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Author: 

Ohio.  General  Assembly. 

Title: 

Report  of  the  Special 
Joint  Taxation... 

Place: 

Columbus 

Date: 

1919 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -  EXISTINQ  BIBLIOGRAPHIC  RECORD 


653 
Oh36 


RESTRICTIONS  ON  USE: 


Ohio.   General  ussembly.  Special  joint  taxation  com- 
mittee. ^ 

Beport  of  the  Special  joint  taxation  committee  of  the 
83rd  Ohio  Oeneral  assembly.  December  11, 1919.  Colum- 
bus, 0.,  The  F.  J.  Heer  printing  co.,  1919. 

165  p.  incl.  tables.  23'". 
Frank  C.  Parrett,  chairman. 

"A  report  on  the  operation  of  state  income  taxes  by  Harley  L.  Lutz, 
PH.  D.  ...  Presented  to  the  Special  j<^t  taxation  committee,  September 

^  mr :  p.  ash-m. 

1.  Taxation— Ohio.  2.  Jacome  tax.  i.  Parrett,  Frank  C  ii.  Lutz, 
Harl^  I^eist,  1882-        ui.  Ohio.  Laws,  statutes,  etc  i?.  Title. 


Library  of  Congress 


HJ2427A7  1919 

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LIBRARY 


School  of  Business 


5 


I 


REPORT 


»»#»••  •» 


•      J.  J        •  •  •      »  » 

»•       J     J     »         •     >t  » 


OF  THE 


Special  Joint 
Taxation  Committee 


OF  THE 


83rd  Ohio  General  Assembly 


December  11,  1919 


Columbus,  Ohio: 
The  F.  J.  Heer  Printing  Co. 
.  1919 


PREFACE. 


(.53 


The  special  joint  committee  on  taxation  in  submitting  herewith  its 
recommendations  to  the  general  asseml)ly  for  the  purpose  of  increasing 
the  depleted  revenue  stores  of  the  state  and  its  political  sub-divisions,  has 
no  disposition  to  arouse  a  sympathetic  reception  for  its  prc^^ram  by  a 
recital  of  the  tremendous  difficulties  encountered.  Our  only  purpose  in 
presenting  this  voluminous  report  is  to  aflFord  the  general  assembly  and 
the  interested  public  an  opportunity  to  glean  therefrom  an  idea  of  the 
existing  fiscal  conditions  and  the  course  of  reasoning  followed,  which 
have  led  to  the  conclusions  herein  presented. 

The  work  has  been  arduous  and  e^tacting.  There  has  been  a  decided 
reluctance  to  increase  the  already  onerous  tax  burden  and  the  committee 
has  been  mainly  inspired  by  a  sense  of  necessity  for  increased  revenues 
in  order  that  the  normal  functions  of  our  government  be  maintained  and 
nourished. 

Much  valuable  assistance  has  been  rendered  the  committee  in  its 
labor  by  interested  citizens,  inspired  by  a  sense  of  devotion  to  our 
public  institutions  of  government  When  request  was  made  of  these  to 
lend  their  assistance  and  experience  to  the  committee,  a  hearty  and 
unselfish  response  was  made,  that  must  be  characterized  as  most  refresh- 
ing.   To  these,  a  grateful  acknowledgement  is  made. 

Public  officials,  state,  county  and  municipal,  have  been  most  helpful. 
Without  exception  they  have  rendered  suggestions  and  advice  of  in- 
estimable value. 

Specialized  assistance  has  been  called  to  the  aid  of  the  committee 
and  the  value  of  this  help  has  been  so  marked,  that  we  despair  of  im- 
pressing the  public  with  its  incalculable  worth.  Professor  Harley  L. 
Lutz,  of  Oberlin  College,  was  drafted  into  the  service  of  the  committee 
as  economic  advisor.  He  was  dispatched  to  make  a  special  study  and 
survey  of  the  operation  of  the  income  tax  in  the  states  of  Wisconsin, 
New  York  and  Massachusetts.  His  report  based  upon  his  investigations 
is  found  in  the  appendix  to  this  report.  In  all  of  the  deliberations  of 
the  committee,  his  advice  and  suggestions  have  been  found  most  valuable 
and  hdpftil.  The  tedious  task  of  preparing  this  report  has  been  left 
largely  in  hisr  hands  and  those  interested  sufficiently  to  give  it  careful 
study  should  be  the  best  judges  of  the  thoroughness  and  soundness  of 
his  work. 

3 


4 

Upon  the  organization  of  the  committee,  Professor  Clarence  D 
Laylm  of  the  Ohio  State  University  and  L.  D.  Johnson,  were  selected  as 
legal  counsel.  Professor  Laylin  has  had  long  years  of  experience  with 
taxation  statutes,  as  an  attache  of  the  Attorney  General's  office,  Mr 
Johnson  has  been  engaged  in  the  general  practice  of  law  for  years  and 
durmg  a  recent  administration  served  as  assistant  Attorney  General 
B<^  of  these  gentlemen  have  a  broad  grasp  of  affairs  generally  speaking 
and  a  comprehensive  understanding  of  the  magnitude  of  the  public 
problan  of  taxation.  We  have  no  intent  of  engaging  in  fulsome  praise 
but  their  patient  and  constant  adherence  to  the  problems  of  the  com- 
mittee is  worthy  of  a  higher  degree  of  appreciation  than  mere  words 
.  can  convey. 

The  greater  part  of  this  report  has  been  prepared  under  the  pressure 
incident  to  the  opening  of  a  legislative  session.  Every  effort  has  been 
made  to  check  and  verify  the  figures  presented,  but  some  clerical  inac- 
curacies doubtless  remain.  Equal  care  has  been  taken  with  all  other 
statements  of  fact  made  in  the  report  but  it  is  possible  that  some  errors 
remain  notwithstanding  these  precautions. 

The  committee  in  presenting  its  conclusions,  once  more  wishes  to 
convey  its  appreciation  of  the  sympathetic  attitude  of  all  those  who  have 
an  understanding  of  its  problems.  The  only  ambition  that  it  has  in 
discharging  its  duties  to  the  best  of  its  ability,  is  that  there  may  be  here- 
with presented  some  remedy  that  will  obviate  the  necessity  of  lowering 
our  governmental  standards. 

Frank  C.  Parrett, 

Chairman. 


« 


CHAPTER  I. 


QripiiMMition,  Penoiuiel  and  Proceduire  of  the  CommUtee. 

The  s|>ecial  joint  taxation  committee  of  the  83rd  general  assembly 
of  Ohio  was  created  by  Senate  Joint  Resolution  6,  which  was  adopted 
in  January,.  1919.   The  text  of  this  resolution  is  as  follows: 

83d  GsNraiAL  Assembly^  Regular  Session,  1919. 

S.  J.  R.  NO.  6. 
MR.  PARRETT. 

JOINT  RESOLUTION 

Relative  to'  the  Appointment  of  Special  Joint  Taxation  Committee.  • 

Wherkas,  It  is  apparent  that  there  will  be  a  serious  deficit  in  the  state, 
county  and  municipal  revenues,  the  estimated  amount  being  $7,000,000;  and; 

"Whereas,  The  municipalities  of  the  state  are  seriously  embarrassed  by 
the  lack  of  sufficient  funds  to  operate  their  normal  and  necessary  activities ;  and 

Whereas,  It  is  the  manifest  duty  of  the  present  General  Assembly  to  pro- 
vide means  whereby  these  conditions  may  be  met;  and 

Whereas,  It  is  imperative  that  taxation  and  revenue  measures  be  enacted 
and  in  effect  prior  to  taxation  day  in  April,  1919,  that  the  welfare  of  the  state 
of  Ohio  may  be  properly  cared  for;  therefore 

Be  it  resolved  by  the  General  Assembly  of  the  State  of  Ohio: 

That  four  Senators,  not  more  than  two  of  whom  shall  belong  to  the  same 
political  party,  appointed  by  the  President  of  the  Senate,  and  four  members  of 
the  House  of  Representatives,  not  more  than  two  of  whom  shall  belong  to  the 
same  political  party,  appointed  by  the  Speaker  thereof,  shall  constitute  a  Special 
Joint  Taxation  Committee  to  prepare  and  introduce  in  the  House  and  Senate 
such  bill  or  bills  as  they  may  agree  upon  that  will  give  the  people  of  this  state 
revenues  to  operate  the  governmental  functions.  Any  or  all  of  bills  prepared 
by  said  Committee  shall  be  introduced  in  the  Senate  and  House  of  Representa- 
tives by  such  Committee,  and  any  rules  of  the  Senate  or  House  or  joint  rules 
of  the  Senate  and  House,  shall  be  hereby  suspended  to  permit  of  the  introduc- 
tion of  such  non-partisan  taxation  measures. 

Said  committee  may,  in  its  discretion  employ  a  stenographer  and  expert 
authorities  on  matters  of  taxation  and  such  other  help  as  may  be  deemed  neces- 
sary to  assist  in  the  performance  of  its  duties.    To  carry  out  the  provisions 
this  resolution  this  committee  is  authorized  to  hold  meetings  while  the  legisla- 
ture is  in  session  to  spend  from  the  money  heretofore  or  hereafter  appropriated 

5 


6 


to  discharge  the  expense  of  l^slative  committees,  such  sum  or  sums  as  may 
be  necessary,  same  to  be  paid  by  the  state  treasurer  on  the  warrant  of  the  state 
auditor,  which  warrant  shall  be  issued  upon  filing  itemized  expense  accounts 
from  time  to  time,  the  same  to  be  approved  by  the  Chairman  and  Secretary  of 
the  committee. 

■i 

Pursuant  to  the  terms  of  this  resolution  which  was  later  amended 
to  include  six  members  from  each  body,  the  following  members  were 
appointed  to  the  committee.    From  the  Senate : 

William  Agnew,  of  Cuyahoga  County. 
Wallace  W.  Bellew,  of  Hamilton  County. 
Thomas  M.  Berry,  of  Allen  County. 
John  E.  Holden,  of  Warren  County. 
Frank  C.  Parrett,  of  Clinton  County. 
Frank  E.  Whittemore,  of  Summit  County. 
From  the  House: 

Rui)ert  R.  Beetham,  of  Harrison  County. 
R.  M.  Billingslea,  of  Butler  County. 
Milton  Qark,  of  Warren  County. 
Edward  *J.  Hopple,  of  Cuyahoga  County. 
Huston  T.  Robins,  of  Ross  County. 
Francis  M.  Thompson,  of  Franklin  County. 

The  committee  met  on  January  22,  1919,  and  organized  by  electing 
Senator  Frank  C.  Parrett  Chairman  and  Francis  M.  Thompson  secretary. 
Professor  Clarence  D.  Laylin  of  Ohio  State  University  and  Hon.  L.  D. 
Johnson  of  the  Columbus  bar  were  retained  as  counsel  to  the  committee. 
Professor  H.  L.  Lutz  of  Oberlin  College  was  later  called  in  as  economic 
advisor.  Miss  Minnie  Rogers  was  employed  as  stenographer  to  the 
committee. 

A  vast  amount  of  time  was  spent  during  the  first  session  of  the 
general  assembly  in  conducting  hearings  and  discussing  financial  mat- 
ters with  the  large  number  of  persons  who  appeared  before  the  com- 
mittee. Many  of  these  appeared  in  their  individual  capacity  while  a 
considerable  number  spoke  also  as  the  representatives  of  various  organ- 
izations. The  following  partial  list  of  the  organizations  which  were 
thus  represented  will  indicate  the  great  variety  of  viewpoints  which  were 
given  expression  before  the  committee  in  this  way. 

The  Chambers  of  Commerce  of  Cincinnati,  Cleveland,  and  various 
other  cities. 

The  Qeveland  Bankers'  Committee  on  Taxation. 

The  Geveland  Association  of  Building  Owners  and  Managers. 

The  Farmers  Defense  League. 


The  Conty  Auditors'  Association. 

The  Ohio  Association  of  Real  Estate  Boards. 
The  Ohio  Library  Association. 
The  Ohio  State  Automobile  Association. 
The  Ohio  State  Tax  Commissicm. 
The  Ohio  State  Grange. 
The  Ohio  Taxpayers  League. 
The  Taxpayers  Association  of  Hamilton  County. 

Various  Boards  of  Education,  Chambers  of  Commerce,  Financial 
Directors  and  cities  and  Superintendents  of  Schools  were  also  heard. 

In  the  preparation  of  each  measure  the  committee  has  given  care- 
ful attention  to  the  best  developments  of  other  states.  Those  persons 
who  have  been  especially  qualified  to  assist  with  the  preparation  of  the 
various  measures  undertaken  by  the  committee  have  been  invited  to 
conference  when  the  respective  drafts  were  in  preparation.  We  feel, 
thetrefore,  that  we  have  had  the  benefit  and  advantage  of  a  large  amount 
of  expert  opinion  and  advice  from  these  many  sources,  and  we  advance 
our  program  with  the  greater  confidence  because  of  this  valuable  as- 
sistance in  its  formulation. 

After  the  adjournment  of  the  first  session  of  the  assembly  a  sub- 
committee was  appointed  to  continue  the  study  of  the  problems  before 

the  committee  and  with  instructions  to  prepare  first  drafts  of  bills  for 
the  consideration  of  the  \vhole  committee.  The  members  appointed  to 
the  subcommittee  were : 

Chairman,  Frank  C.  Parrett. 
Senator  William  Agnew. 

Mr.  Huston  T.  Robins  and  Mr.  Francis  W.  Thompson. 

The  sub-conmiittee  has  held  frequent  sittings  since  the  latter  part  01 
the  summer, ^and  after  its  work  had  been  practically  completed  the  entire 
committee  was  called  in  conference  upon  the  measures  prepared.  These 
bills  come  now  to  the  general  assembly  as  the  result  of  the  whole  com- 
mittee's deliberations. 

In  this  report  we  have  undertaken  first  to  outline  the  general  financial 
condition  of  the  state  and  its  subdivisions.  In  Chapter  III  we  have  dis- 
cussed certain  features  of  the  present  system  of  raising  revenue,  giving 
special  attention  to  those  features  which  are  involved  in  the  recommenda- 
tions which  we  are  herewith  presenting.  In  our  final  chapter  these 
recommendations  are  discussed  briefly  and  the  committee's  drafts  of  the 
proposed  bills,  together  with  a  report  on  the  operation  of  state  income 
taxes,  are  given  in  an  appendix. 


CHAPTER  11. 
The  Fmnncial  Sitmtioii. 

W  hen  the  83rd  General  Assembly  of  Ohio  convened  in  January, 
1919*  it  was  generally  conceded  that  the  proWems  of  finance  and  taxation 
were  among  the  most  .important  that  were  to  occupy  its  attention.  These 
problems  had  been  forced  so  prominently  into  the  foreground  by  a  chain 
of  sequences  that  extended  far  back  into  Ohio's  financial  history.  It 
is  not  necessary  to  the  plan  of  this  report  to  analyze  in  detail  the  back- 
ground of  the  difficulties  which  had  arisen,  for  that  would  lead  us  into 
a  general  discussion  of  the  vast  problem  of  financial  control  and  adminis- 
tration, a  field  which  really  lies  outside  the  jurisdiction  of  the  present 
committee.    It  is  sufficient  here  simply  to  point  out  that  a  final  solution 
for  the  complex  and  extensive  problems  of  public  finance  may  be  found 
only,  if  ever,  when  all  phases  of  these  problems  are  considered  in  their 
proper  relation.   A  consideration  of  revenue  problems  alone  is  not  suf- 
ficient for  the  proper  solution  of  the  financial  puzzle;  the  control  of 
expenditures  and  the  proper  correlation  of  outgo  and  income  are  equally 
essential.    In  other  words,  the  whole  problem. of  budgetary  development 
is  involved  in  any  final  settlement.   In  our  judgment  the  whole  question 
of  a  general  and  efficient  budgetary  system  is  of  such  paramount  im- 
portance that  we  commend  it  in  all  earnestness  to  the  attention  of  the 
General  Assembly.   Genuine  and  effective  economy  in  the  public  business 
can  only  be  assured  by  the  most  careful  consideration  of  the  means  by 
which  proper  control  over  both  expenditures  and  revenues  can  be  set  up. 

We  have  been  duly  appreciative  of  the  meaning  and  scope  of  this 
large  task  of  financial  reorganization.  The  present  committee  was  cre- 
ated, however  not  for  the  purpose  of  studying  the  broader  problems  here 
mvolyed,  but  rather  with  a  view  to  the  consideration  of  one  angle  only 
of  this  general  problem,  namely,  the  improvement  of  the  revenue  laws 
of  the  state;  and  such  suggestions  bearing  upon  other  angles  of  the  prob- 
lem as  may  appear  in  this  report  or  as  may  be  found  in  the  measures 
herewith  recommended  are  included  only  because  of  their  connection  with 
the  main  work  of  the  committee.  It  has  been  our  desire,  nevertheless, 
to  correlate  our  own  work  with  any  that  may  hereafter  be  done  for  the 
future  improvement  of  the  financial  structure  of  the  state,  and  we  have 
therefore  earnestly  sought  to  prepare  our  constructive  proposals  ia  such 

8 


9 

a  manner  as  will  make  them  worthy  of  permanent  incorporation  into 
a  more  general  program  of  financial  reform. 

The  members  of  the  General  Assembly  will  readily  recall  the 

financial  situation  in  the  state  at  the  time  the  session  convened.  The 
state  treasury  was  believed  to  be  on  the  verge  of  a  serious  shortage;  a 
number  of  municipalities  and  school  districts  were  facing  bankruptcy, 
and  in  some  instances  actual  defaulting  of  interest  and  salary  payments 
had  occurred.  These  conditions  became  worse  as  the  session  advanced 
and. with  more  thorough  discussion  of  the  situation  by  the  committee  it 
became  increasingly  evident  that  two  lines  of  improvement  must  be  pur- 
sued. The  first  was  the  immediate  enactment  of  temporary  relief  meas- 
ures, and  the  second  was  the  development  of  more  permanent  plans  for 
the  prevention  of  similar  conditions  in  the  future.  The  plans  for  tempo- 
rary relief  were  in  time  agreed  upon  and  appropriate  legislation  enacted. 
Under  these  laws  many  localities  have  proceeded  to  take  advantage  of 
the  special  measures  authorized  and  it  is  to  be  presumed  that  in  most 
instances  something  adequate  temporary  relief  has  been  secured.  Your 
committee  therefore  has  partici])ated  in  the  two-fold  task  of  formu- 
lating the  preliminary  legislation  and  of  presenting,  after  more 
extended  study,  other  measures  from  which  more  adequate  and  lasting 
results  might  be  expected.  A  legislative  recess  until  December  ist  was 
taken  in  order  to  allow  the  committee  the  time  necessary  for  this  work. 
Since  the  form  which  the  committee's  recommendations  might  take  would 
naturally  depend  upon  the  constitutional  provisions  relating  to  taxation, 
the  date  for  the  opening  of  the  adjourned  session  was  arranged  to 
permit  the  classification  amendment  to  be  voted  upon  by  the  people. 

It  will  be  recalled  that  when  the  legislature  convened  the  status  of 
the  constitutional  provisions  relating  to  taxation  was  in  some  doubt.  At 
the  electicm  of  1918  the  people  had  voted  approval  of  two  amendments 
to  Article  XII,  Section  2  of  the  Constitution,  relating  respectively  to 
the  classification  of  property  for  taxation  and  the  exemption  of  mort- 
gages. The  question  of  the  consistency  of  these  provisions  had  been 
raised,  and  until  an  answer  had  been  given  by  the  Supreme  Comt  it 
was  of  course  impossible  to  go  forward  confidently  with  tax  legislation. 
The  Court's  decision  against  the  classification  amendment  left  the  whole 
matter  of  popular  policy  in  confusion  and  in  order  to  secure  a  final 
expression  of  the  public  will  it  was  agreed  to  re-submit  the  classification 
proposal  at  the  next  regular  election.  In  the  mean  time  the  committee 
proceeded  with  such  legislative  measures  as  were  already  clearly  author- 
ized by  the  constitution,  inchuHng  the  inheritance  tax,  the  income  tax 
and  the  graduated  automobile  license  tax.  The  inheritance  tax  was 
enacted  before  the  session  adjourned  because  of  the  necessity  of  pro- 
viding at  the  earliest  possible  moment  a  revenue  resource  which  would 


lO 

approximately  replace  the  liquor  license  tax.  The  remainder  of  the 
committee's  program  is  submitted  herewith.  The  classification  amend- 
ment was  decisively  defeated  and  we  have  interpreted  this  vote  to  mean 
that  in  so  far  as  a  property  tax  is  levied  in  Ohio  it  shall  be  levied  by 
a  uniform  rule.  The  proposed  bills  which  fonn  an  appendix  to  this 
report  have  been  adapted  as  nearly  as  may  be,  accordingly,  to  the  general 
requirements  of  the  constitutional  rule  of  uniform  taxation  and  in  the 
comments  upon  these  measures  which  occur  later  will  be  found  some 
explanation  of  the  features  in  which  such  adaption  has  been  undertaken. 

The  problems  to  which  the  committee  has  directed  its  attention  have 
been  revenue  problems.   As  indicated  above,  we  have  not  attempted  to 
meet  the  demand  for  larger  revenues  by  an  inquiry  into  the  methods  of 
spending  those  revenues  already  received,  nor  by  attempting  to  pass  upon 
the  propriety^ of  the  purposes  for  which  any  administrative  unit  has  been 
spending  its  income.    From  every  quarter  has  been  coming  the  pressure 
for  greater  revenue  resources  and  our  task  has  been  to  provide  these 
larger  resources.   The  intensity  of  the  need  has  not  been  exactly  meas- 
ured, although  some  data  have  been  compiled  which  show  the  volume 
and  the  growth  of  state  and  local  expenditures.  These  data  were  useful 
in  reaching  a  decision  upon  the  important  question  of  the  number  and 
the  scope  of  the  new  revenue  proposals  to  be  offered.    An  effort  has 
also  been  made  to  appreciate  the  effect  of  each  change  suggested  upon 
the  general  revenue  situation  in  order  that  a  proper  balance  aong  the 
several  parts  might  be  maintained. 

The  importance  of  this  consideration  will  be  clear  from  an  illuus- 
tration.  The  principal  source  of  local  revenue  is  the  direct  tax  on 
property.  It  has  been  decided  that  the  uniform  rule  shall  be  retained 
and  that  all  property  shall  be  taxed  at  its  full  value  in  money.  Accord- 
ingly,^ we  have  given  some  attention  to  the  »  laws  relating  to  the 
effective  enforcement  of  the  uniform  rule.  The  urgency  of  other 
revenue  measures  for  local  use,  such  as  the  income  tax,  will  depend 
upon  the  effectiveness  of  these  provisions.  It  is  impossible  to  forecast 
with  any  exactness  the  yield  of  a  more  strictly  enforced  general  property 
tax,  but  this  much  is  clear  from  the  experience  of  other  states  — as 
long  as  the  uniform  rule  remains  the  income  tax  must  be  regarded  as  a 
minor  and  auxiliary  revenue  resource  rather  than  as  a  major  feature 
of  the  tax  system.  Its  yield,  therefore,  will  undoubtedly  be  less  under 
such  a  view  of  its  proper  position  and  use. 

But  another  angle  of  the  problem  arises.  The  constitutional  provi- 
sion which  authorizes  income  and  inheritance  taxes  requires  that  at  least 
50%  of  the  proceeds  of  such  taxes  be  returned  to  the  municipal  corpora- 
tions and  townships  in  which  the  taxes  originated.  What  shall  be  done 
with  the  other  50%?   All  or  any  part  of  it  may  either  be  returned 


II 


locally  or  retained  by  the  state.  A  proper  settlement  of  this  question 
involves  a  consideration  of  the  relative  needs  of  the  state  and  the  local 
districts,  and  raises  numerous  questions  of  general  policy  as  to  the  finan- 
cial responsibility  for  the  performance  of  public  functions.  If  the  state 
retains  it,  how  does  this  affect  the  state's  revenue  in  comparison  with 
state  needs?  *  The  addition  of  even  a  moderate  revenue  from  such  a 
source  to  the  present  income  of  the  state  forces  a  consideration  of  many 
problems  which  are  not  apparent  at  first  thought  in  the  simple  question 
of  the  relation  of  the  property  and  income  taxes.  We  have  endeavored 
constantly  to  weigh  considerations  of  this  sort  in  working  out  our 
recommendations.  Almost  every  other  subject  with  which  we  have  dealt 
has  given  rise  to  similarly  far-reaching  complications,  the  only  clue  to 
which  is  be  found  in  the  general  principle  of  a  properly  diversified  and 
properly  balanced  revenue  system. 

A  satisfactory  answer  to  the  question  of  the  new  revenue  resources 
that  must  be  developed  can  only  be  made  from  a  comparison  of  the 
present  income  and  needs  of  the  state  and  its  subdivisions.  In  the  effort 
to  ascertain  approximately  the  extent  of  this  need  for  additional  revenues 
we  have  considered  the  financial  condition  of  the  state,  the  municipalities 
and  the  schools.  The  evidence  which  has  come  to  us  from  all  sources 
appears  to  establish  conclusively  the  case  for  larger  revenues,  if  many 
important  functions  of  the  state  and  the  local  governments  are  not  to 
fail  of  proper  realization. 

I.   The  State  Finances. 

The  general  situation  with  regard  to  the  state  finances  is  thus  set 

forth  by  the  Auditor  of  State  in  an  advance  copy  of  his  report  for  1919: 


STATEMENT  OF  ACCOUNTS  WiTil  ALL  STATE  FUNL>d  FOR  EACH 

FISCAL  YEAR  FROM  1913  TO  1919  INCLUSIVE. 


Fiscal  Year. 

Total  amount  ap- 
propriated by 
the  General 
Assembly.  All 
funds. 

Total  disburse- 
ment durinp 
the  fiscal  year. 
All  funds. 

Total  receipts 
during  fiscal 
year.  All 
funds. 

Excess    of  dis- 
bursements 
over  receipts 
for  fiscal  year. 
All  funds. 

Excess  of  re- 
ceipts over  dis- 
bursements for 
fiscal  year.  All 
funds. 

Total   cash  bal- 
ance at  end  of 
fiscal  year.  All 
funds. 

1913   

1914  

$24,929,7&4  90 
29,347,632  38 
24,374,544  C9 
30,822,544  19 
30,515,788  88 
39,623,867  05 
39,345,420  66 

$14,707,624  46 
18,345,251  65 
11.886,009  06 
19,695,912  33 
21,293,020  88 
22, 827. •29:)  61 
25,934,104  33 

$15,578,471  60 
20,544,539  15 
11,541,588  84 
19,175,760  29 
21,910,626  83 
23,695.073  3t 
25,476,682  23 

$344,420  22 
620,142  04 
382,394  05 

$870,847  14 
2,199.287  CO 

$5,535,698  S3 
7,7.34.985  83 
7.890.666  96 
6,b70,4^  92 
6,48R,02»  87 
7,3.')5.507  60 
6,898,385  60 

1916   

1917   

1918   

870,226  91 

467,422  10 

*1915  shows  seven  and  one-half  months  caused  by  change  of  end  of  fiscal  year  from 
November  15th  to  June  80th. 

NOTE :  —  The  large  cash  balance  at  the  end  of  each  fiscal  year  does  not  represent  a 
surplus — simply  a  total  balance  of  the  several  funds.  A  large  portion  of  the  balance  m  all  the 
funds  are  obligated  for  specific  purposes.  Both  receipts  and  disbursements  include  the  transactions 
of  the  rotary  fund. 


13 


The  Auditor's  comments  upon  a  similar  table  in  his  report  for  1018 
are  worth  repeating.    He  said:  • 

"It  is  gratifying  to  note  that  for  the  first  time  since  1914  the  receipts  of  tlie 
Tl  f  ^fl"^!^"'        P*^*  ^'^v*^  «^<^eeded  the  disbursements.    This  fact  is 

liable  to  be  misleading  unless  we  make  proper  analysis  of  the  source  of  the  in- 
creases  and  determine  what  state  funds  are  benefited 

n  .h  "^^*"  abnormal  increase  of  $416,314.70  in  the' sale  of  automobile  tags  adds 
nothing  to  the  General  Revenue  Fund  of  the  state. 

^Jhe  change  of  the  Liquor  License  Law,  providing  that  licenses  shall  be 
grant^  m  May  instead  of  November,  caused  additional  revenue  of  $258,050.00  to 
be  collected  m  the  fiscal  year  1918  that  under  the  old  law  would  not  have  been 
received  by  the  state  until  during  the  fiscal  year  1919. 

h  H  remarkable  increase  in  the  grand  dupUcate*  of  the  state  last  year  of  eight 
hundred  and  fifty  milhon  dollars  by  reason  of  the  self-listing  plan  ^d  abno!^ 
war  valuations  augmented  the  receipts  of  the  Highway,  University  and  Cbn^ 
bchool  Funds  for  which  the  state  makes  a  direct  tax  levy  of  46-100  of  a  miU  This 
increase  01  state  revenue  from  direct  taxation  the  past  year  amoimted  to  $282;003  61 

th.n  ^^'T.u'^  '^^^  increased  more  rapidly 

ban  usual  the  past  year,  but  these  additions,  with  the  exception  of  a  part  ofthe 
Liquor  Licence  Law  increases,  do  not  go  into  the  General  Revenue  Fund  f 
which  the  General  Assembly  makes  all  appropriations  for  the  running  expenses  of 
the  state  government.  *  c*F««c»  ox 

"The  General  Assembly,  when  it  ;iieets  in  January,  1919.  ^iU  have  as  the 

rundV":r'''^H  '""V  '^'^  '^-^^^  ^^^^^  appr^pnatio;  of  tS  ne<^^ 
funds,  to  conduct  the  state  government  for  the  biennium  beginning  July  11919 
and  ending  June  30,  1.21.  If  the  General  Assembly  realizes!^  it  2^  That  ^ 
this  crisis  of  all  the  ages,  prudence  is  a  patriotic  duty,  it  wiU  pay  no  attention  to 
any  book  balances  that  the  records  of  the  auditor's  and  treasurer's  offices  may  show 
but  confine  its  appropriations  strictly  within  the  limits  of  the  estimated  revenues 
for  each  year  that  will  come  into  the  state  treasury  as  follows  • 

1920,  -^$S80%0.'^''  ^'^"^  ^"^^  ^'  *^  30. 

1921,  -SSoO.'''''  '"""'"^  -^"^^  ^'  *°  ^' 
"I  warn  the  General  Assembly  not  to  appropriate  in  excess  of  these  estimates 

unless  by  legislation  it  provides  additional  revenues  that  wUl  accrue  to  the  funds' 
from  which  appropriations  in  excess  of  estimated  receipts  are  made  and  be  reason- 
ably certain  that  such  new  revenues  will  meet  all  increases.  The  constitution  of 
the  state.  Art.  XII,  Sec.  4,  says:  'The  General  Assembly  shall  provide  for  raisin* 
revenue  sufficient  to  defray  the  expenses  of  the  state,-for  each  year.'  It  is  uncofl^ 
stitutional  to  make  appropriations  in  excess  of  estimated  receipts." 

The  warning  conveyed  in  the  last  paragraph  quoted  is  of  especial 
significance  when  we  compare  columns  I  and  3  of  the  above  table.  We 
find  that  there  has  been  regularly  appropriated  an ^ount  far  in  excess 
of  the  actual  receipts  for  the  fiscal  year,  which  means  that  the  state  has 
been  able  to  keep  afloat  financially  only  by  reason  of  the  fact  that  a 


13 


large  volume  of  appropriations  has  lapsed  each  year.  The  margin  of, 
appropriations  over  disbursements  was  unusually  wide  in  1918  because 
of  the  interruption  to  normal  outlays  occasioned  by  the  war.  It  is 
natural  and  even-  necessary  that  these  losses  be  made  good  by  greater 
activity  with  the  return  of  peace  and  the  auditor's  warning  of  the  danger 
of  relying  on  the  continued  lapsing  of  so  large  a  volume  of  apjM-opria- 
tiiMis  is  very  timely. 

In  addition  to  the  estimates  for  the  present  biennium  which  are 
contained  in  the  auditor's  report,  above  quoted,  we  have  been  furnished 
with-  some  estimates  which  were  prepared  under  the  direction  of  the 
governor's  office.  Four  estimates  of  the  receipts  were  made,  on  the 
following  bases :  f  he  average  increase  in  receipts  for  the  five  full  fiscal 
years  1913-1919  (omitting  the  nine  mcmths  from  Noveinber  15,  1914,  to 
June  30,  1915) ;  the  average  increase  for  the  four  years  1915-1919;  the 
average  increase  for  the  three  years  1915-1918;  and  an  estimated  in- 
crease in  revenues  on  the  basis  of  the  gain  in  corporation  tax  receipts 
in  the  first  four  months  of  the  fiscal  year  1919-20  over  the  receipts  for 
the  corresponding  months  of  the  preceding  fiscal  year.  The  estimates 
of  expenditures  were  the  same  throughout.  A  tabulation  of  these  figures 
is  presented  in  Table  II. 

TABLE  II  — ESTIMATED  RECEIPTS  AND  DISBURSEMENTS  OF  THE 
STATE  GOVERNMENT  FOR  THE  BIENNIUM,  1919-21. 

/.  Expenditures. 

1919-21  Appropriation  Bill    $52,973,494  Ifi 

Sundry  Bill  (est.)  -   450,000  00 

Institution  for  feeble  minded   650,000  00  * 

Miscellaneous  special  bills  (est.).   500,000  00 

Total  already  voted   $54,573,494  16 

AddiHonai  Appropriations  Required  (estimated) 

Board  of  Administration: 

1    Institution  for  feeble  minded.....  $800,000  00 

1    Institution  for  insane..   800,000  00 

Extra  cottages  for  feeble  minded   592,000  00 

Extra  land,  hospital  for  insane   83,000  00 

Increased  operating  expenses   1,548,000  00 

Increase  for  institution  engineers   70,000  00 

Increase  for  bindery  workers   8,000  00 

Increase  for  Universities   600,000  00 

Increase  for  other  State  Services..........  3,500,000  00 

Increase  in  operating  and  maintenance  ex- 
pense for  Ohio  Sute  University   180,000  00 


Total  additional  appropriations 


$8,181,000  00 


14 

Unlapscd  appropriations   *n  4dq  tap  ro 

^  "h«»ated  lapses  of   4,0.«),000  00 

  7,443.606  58 

Grand  .oul  including  ^tima.es   ♦70.198.100  68 

//.  Receipts 

(a)  On  the  basis  of  increase  in  the  average 
total  receipts  for  the  full  fiscal  years 

1913-1919:  ^ 

Balance  July  1,   1919   $6  898  m«i  'Ui 

Receipts    ....  ^*^*X?:  ^ 

T  ,    50.622.826  87 

Inhentance  tax  (estimated)   3,000; 000  00 

Deficit  for  biennitim   '     I   W,521,212  37 

Deficit  for  each  year  9,676,888  32 

  4,838,444  16 

(b)  On  the  basis  of  increase  in  the  average 
total  receipts  for  the  four  full  fiscal 
years  1915-1919: 

x„.    V  ;   53,707,062  99 

Inhentance  tax  (estimated)   3,000,000  00 

Deficit  for  biennium  "  103,006,348  49 

Deficit  for  each  year  6,591,752  20 

'    3,295,876  10 

(c)  On  basis- of  the  increase  in  the  average 
receipts  from  corporation  taxes  during 
past  three  years,  1916-18,  and  exclud- 
ing liquor  tax: 

rSu  t6.898.385  50 

Inhentance. ;-(esti;„a.d)\\\\-:::::: 

'    158,717,385  50 

Total  receipts  . . . 

Deficit  for  biennium  1^8,717,385  50 

Deficit  for  each  vear  11,480,715  19 

'    5,740,367  59 

(d)  On  basis  of  increase  in  corporation 
taxes  at  same  rate  as  the  increase  for 
the   first   four  months  of  fiscal  year 

1919"^^'  ^  ^^^^ 

rSs'"^'''^'''   1^,898,385  50 

Inheritance  tax  (estimated):.::::::::     tSjw  S 

Deficit  for  biennium  "  —    W.434,333  41 

Deficit  for  each  year  5,763,767  18 

^   •   2,881,883  64 


IS 

A  saving  will  be  effected  to  the  general  revenue  fund  of  the  dif- 
ference between  the  receipts  from  the  common  school,  university  and 
sinking  fund  levies,  and  the  amounts  paid  out  for  sinking  funds  and  m 
aid  of  common  schools.  On  the  1918  figures  this  saving  would  be  ap- 
proximately $1,700,000.  Deducting  this  amount  from  the  above  deficits, 
the  annual  deficit  would  be:  . 

Under  (a)  $3,138,144  16 
"     (b)    1,595,876  10 
«     (c)    4,040,357  59,  and  0 
«     (d)    1,181,883  64 

The  additional  appropriations  for  which  estimates  are  presented 
do  not  include  an  allowance  for  the  building  program  of  the  various 
state  supported  universities.  Figures  have  been  compiled  which  indi- 
cate that  the  student  enrollment  of  these  institutions  will  increase  rapidly 
during  the  next  ten  years,  and  it  is  calculated  that  an  adequate  program 
of  building  for  the  purpose  of  accomodating  this  increase  in  enrollment 
would  require  for  all  of  the  state  universities,  at  least  $1,000,000  annu- 
ally during  the  ten-year  period. 

Some  items  in  the  list  of  estimated  additional  expenditures  deserve 
explanation.  These  items  were  supplied  to  the  committee  as  constituting 
a  part  of  the  enlarged  program  of  public  activities  upon  which  the  state 
had  embarked,  or  should  embark.  By  including  them  in  the  above 
table  we  are  not  to  be  understood  as  giving  them  unqualified  endorse- 
ment, nor  are  we  even  undertaking  to  pass  upon  the  general  questions 
of  state  policy  which  are  here  involved.  We  submit  them  as  the  esti- 
mates which  have  been  offered  to  show  the  scope  of  the  financial  pro- 
gram which  appears  to  confront  the  state,  and  our  calculations  here  are 
based  upon  the  assumption  that  such  a  program  may  be  expected  to  gain 
general  support. 

The  additional  outlays  for  the  care  of  feeble-minded  are  suggested 
by  the  evidence  which  is  readily  available  concerning  the  number  of 
such  persons  now  at  large  in  the  state.  It  is  obvious  that  proper  provi- 
sion for  the  segregation  and  care  of  these  wards  of  the  state  is  a  public 
obligation  which  the  state  of  Ohio  has  not  adequately  discharged  in  the 
past.  Of  the  10,000  feeble-minded  persons  in  the  state,  only  about  3,000 
will  be  provided  for  in  the  above  proposed  institutions,  when  completed. 
The  increased  operating  expenses  of  the  board  of  administration  repre- 
sent in  part  the  increased  costs  of  operation  due  to  wage  and  salary 
advances  now  in  effect,  and  in  part  contemplated  expansion.  The  latter 
portion  comprises  some  $309,000  af  the  total.   The  proposed  increases 


i6 


for  the  universities  and  the  other  state  services  are  for  the  porpoM  of 
making  salary  advances,  and  for  university  operating  expetSeT^ 

basJ^r.^T**'  ^'^^  ^°«P^'      fi^^t  three  being 

the  yield  of  the  corporation  tax.    The  basis  for  this  expected  increase 

prfXT  t?  °' ''''  ^"^^'^^   p--^  gS::? 

providing  for  the  organization  of  corporations  with  no  par  value  stocks 
If  we  consider  the  experience  of  the  past  few  yea«  wrSnd  Ae  dSt 
anging  from  $x  X81.883  to  $4,040,357.  the  difference  being  accouTted 
for  by  the  lo^  m»rece,pts  in  1916  as  compared  with  1914  and  1917.  The 

period  preceding  1919,  but  this  calculatio.i  included  the  return  from  the 

K  aTTt'Ts    '"A'         ^^'■"•^''^  '•^^  ^'^'^  °f  this  tax 
duded,  as  .t  W.II  be  m  the  future,  and  the  estimated  deficit  rises  £0  $2,881  - 

883  even  after  the  mclusion  of  the  yield  of  the  new  inheritance  L  the 
Jass'idv  torLt::'  th,  biennium  is  estimated  by  Tax  Commissi^ 
Cassidy  to  be  $3,000,000.  On  the  other  hand,  it  seems  doubtful  if  the  as- 
««npt,on  whKdi  is  made  in  the  fourth  estimate  can  be  sustained  The 
T  t^T*^'  "•°7%.. rests  on  a  comparison  of  the  four  months 
in  L        S7u  \  "^'^       corresponding  months  of  1918.  that  is 

to  say,  with  the  four  months  of  our  most  strenuous  war  effort  and  of 
our  most  r.gorous  restriction  on  business  activity  not  comiected  with  the 
war.  For  th,s  reason  the  margin  of  increase  thus  shown  appears  to  be 
m  excess  of  that  which  might  reasonably  be  expected  over  a  two-vea^ 
penod  of  post-war  development.  Furthermore,  there  is  no  certaintv 
whatever  ti«t  the  new  capital  stock  law  will  prove  ultimately  as  pop2^ 

T-  T^'^u  The  estimated  receipts 

are  probably  h.gher  than  the  actual  receipts  will  prove  to  be.   On  the 

annual  deficit  during  the  next  two  years  of  from  $1,000,000  to  $4000- 

000.  on  the  basis  of  the  yield  which  may  reasonably  be  expected  from  the 

ZZZ^^l  considering  at  all  the  building 

requirements  of  the  universities.  ^ 

This  situation  makes  it  worth  while  to  analyze  in  somewhat  greater 
detad  the  pnncipal  sources  of  the  state  revenues.   Such  an  analysis  for 

01.  mTfi  '913-1918.  is  presented  in  the  following  table.  In 
1915-1916  the  fiscal  year  was  changed  from  Nov.  15th  to  June  30th  and 
figures  for  the  nme  month  period  are  omitted.  J"'"  ana 


TABLE  III  — ANALYSIS  OF  THE  SOURC£S|iM|AT£  REVENUE, 

1913-1918. 


Source 

1913 

1914 

1916 

1917 

1918 

Capital  stock 
tax   on  do- 
mestic corpora- 

$1,661,123 

358,296 

3,093,740 
2,508,192 

1,295,660 

134, 8»4. 

$1,837,938 

478,584 

1,639,053 
1,451,001 
112,753 

$2,102,597 

597,796 

1,852,828 
1,483,825 
186,444 

$2,198,338 

580,088 

771  528 
1,609,913 

1,721,610 
331,698 

$2,582,702 

564,621 

4  G94  286 
1,768,644 

1,869,655 

287,549 

Fees  from  for- 
eign corpora- 

Excise  taxes  on 
gross  Ficceipts  . 

Liquor  licenses  . 

Fees  from  insur- 
ance companies 

Collateral  inher- 
itance tax   

$9,051,911 
$396,504 

2,878,365 

$8,867,594 
$990,578 

6,252,191 

$9,527,275 
$1,201,259 

3,238,689 

$10,193,184 
$1,745,046 

3,351,074 

$11,762,457 
$2,160,370 

3,633,077 

Automobile  Dept. 

State  Levies  for 
Sinking  Fund, 
Schools  and 
Highways   

Total  taxes... 
All  other  receipts. 

$12,226,780 
3,351,691 

$16,110,363 
4,430,173 

$18. 067, 223 
5,108,877 

$15,280,304 
5,621,672 

$17,555,904 
6,139,169 

Grand  Totals. j$15, 578, 471 

^,544,439 

$19,176, 100* 

$20,910,976 

$23,695,073 

♦As  in  Auditor's  Report,  1916,  p.  67. 


This  table  was  compiled  from  the  material  published  in  the  annual 
reports  of  the  state  auditor.  The  principal  tax  revenues  are  shown  above 
and  the  first  total  represents  the  yield  of  these  taxes.  The  collections  of 
the  automobile  department  and  the  levies  for  irreducible  debt,  universi- 
ties, c<Hmnon  schools  and  highways  are  shown  below,  since  these  collec- 
tions are  not  for  general  sta^e  use  but  are  required  to  be  devoted  to  the 
purposes  for  which  the  lyevy  was  made.  The  automobile  license  tax 
is  also  collected  for  the  specific  purpose  of  road  construction  and  main- 
tenance. The  group  "all  other  receipts"  includes  the  vast  mass  of  miscel- 
laneous fees,  income  of  state  institutions,  interest  on  deposits  of  state 
fimds,  and  an  amazing  variety  of  receipts,  large  and  small.  It  is  rather 
surprising  to  find  that  the  tax  revenues  of  the  state  compose  no  larger 
proportion  of  the  total  state  income  than  here  appears.  It  is  hardly 
surprising,  however,  in  view  of  this  fact  to  discover  that  the  condition 
of  the  state's  revenues  is  believed  by  many  to  be  serious.  There  seems 


to  be  good  ground  for  such  belief  when  we  see  that  only  a  little  over  half 
of  the  total  appropriations  voted  for  the  year  1918,  as  shown  in  Table  I, 
was  actually  raised  by  the  indirect  taxes  imposed  in  this  year.  The 

question  may  very  well  be  raised  whether  the  present  sources  of  state 
revenue  are  really  adequate,  and  sufficiently  elastic,  for  the  proper  con- 
duct of  those  functions  which  the  state  has  already  undertaken.  If  we 
compare  the  actual  receipts  and  disbursements  we  find  that  in  only  one 
yeaf  since  1914  have  the  former  exceeded  the  latter,  which  means  that 
the  present  sources  of  state  revenue  are  so  inelastic  as  to  make  im- 
possible even  so  slight  an  adjustment  for  1918  as  would  be  involved  in 
covering  an  operating  deficit  of  less  than  half  a  million  dollars.  In  view 
of  this  condition,  we  cannot  avoid  the  conclusion  that  the  present  system 
of  providing  the  state's  revenues  from  certain  segregated  sources  is 
breaking  down. 

This  breakdown  becomes  the  more  apparent  if  we  turn  to  consider 
the  matter  of  an  expansion  of  the  state's  activities.  Such  prob- 
lems as  greater  school  relief,  more  general  and  efficient  health 
supervision,  and  more  extended  road  construction  are  pressing 
for  larger  appropriations,  and  rightly  so.  The  last  of  these  may  be 
met  from  the  enlarged  receipts  of  the  automobile  tax,  but  the  other  two 
have  no  such  select  means  of  support.  Since  the  present  state  revenues 
are  evidently  incapable  of  paying  the  present  cost  of  state  administra- 
tion without  excessive  dependence  upon  the  uncertain  quantity  of  lapsed 
appropriations,  it  is  conclusive  that  no  marked  increase  of  outlays  for 
any  purpose,  however  meritorious,  may  be  undertaken  without  a 
material  expansion  of  the  state's  revenue  resources. 

There  doubtless  are  many  points  at  which  some  extension  of  the 
state's  activity  might  be  highly  desirable.  In  the  estimates  of  the  ad- 
ditional appropriations  which  would  be  required  for  the  present  biennium 
some  of  these  more  pressing  claims  upon  the  state  were  suggested.  We 
have  considered  in  this  report  the  problem  of  school  relief  only,  and  we 
have  presented  below  some  arguments  which  we  believe  to  be  con- 
clusive in  favor  of  a  greater  measure  of  state  support  for  the  school 
system.  We  have  recommended  that  the  State's  contribution  for  this 
purpose  be  derived  from  a  direct  levy  on  property  and  the  above  evi- 
dcsice  of  the  limitations  of  the  present  state  resources  has  moved  us  to 
reccmimend  this  plan,  since  the  amount  that  would  be  required  adequately 
to  preserve  and  develop  our  school  system  is  clearly  far  in  excess  of 
anything  that  may  be  expected  from  the  existing  state  resources.  In 
fact  the  requirements  for  this  purpose  are  doubtless  much  in  excess  of 
the  state's  probable  share  of  the  income  tax  although  if  the  available  50% 


19 


of  this  tax  is  devoted  to  these  purposes  the  amount  that  must  be 
secured  from  a  direct  levy  will  be  correspondingly  reduced. 

Moreover,  it  is  quite  certain  that  further  drains  upon  the  general 
revenue  fund  would  be  quite  undesirable  in  view  of  the  financial  situation 
disclosed  by  our  analysis  to  this  point.  The  extent  to  which  the  support 
of  education  and  public  highways  has  been  dependent  upon  this  fund, 
notwithstanding  the  existence  of  levies  for  these  purposes,  is  shown  in 
the  table  presented  herewith,  which  gives  the  yield  of  tiie  state  levies 
and  the  sums  actually  paid  out  on  account  of  these  activities. 


TABLE  IV  — STATEMENT  OF  THE  RECEIPTS  AND  DISBURSEMENTS 
ON  ACCOUNT  OF  THE  STATE  LEVIES,  1913-1918.   (1915-1916  omitted.) 


RECEIPTS. 


Source 

1 

1913 

1914 

1916 

1917 

1918 

Common  School 

Fund   

University  Fund. 

Sinking  Fund  

Total  Receipts. 

$2,138,a37 
526,309 

213,719 

$2,188,434 
604,157 
3,260,757 
218,843 

$207,059 
347,107 
1,126,235 
9,455 

$409,575 
688,832 
2,234,050 
18,617 

$440,043 
746,799 
2,4-22,052 
20,183 

$2,878,365 

$6,252,191 

$3,238,689 

$3,351,074 

$3,633,077 

DISBURSEMENTS. 

Common  School.. 

Sinking-  Fund.... 
Total  Disburse- 

Excess   of  Dis- 
bursements   

Deduct  receipts 
of  Automobile 
Department   . . . 

Net    Burden  on 
General  Revenue 
Fund  through 
r  e  d  u  c  t  i  on  of 
state  levies  

$2,500,371 
619,677 
738,173 
319,576 

$2,570,116 
2,296,280 
1,868,890 
298,327 

$2,569,949 
2,212,837 
2,847,954 
321,910 

$2,604,209 
2,619,422 
3,107,299 
3-22,125 

$2,057,150 
3,068,810 
3,494,419 
322,606 

$4,177,797 

$7,013,613 

$7,952,650 

$8,663,155 

$9,492,991 

$299,432 
396,504 

$861,422 
990,578 

$4,718,961 
1,201,259 

$5,312,081 
1,745,'(M6 

$5,859,914 
2,160,370 

$902,928 

$129,156* 

j  $3,512,702 

$3,567,045 

$3,699,544 

*The  year  1914  shows  a  gain. 

The  receipts  of  the  Automobile  Department  are  deducted  on  the  assumption 
that  these  funds  were  collected  for  the  purpose  of  road  construction  and  mainte- 
nance. 


The  significant  fact  disclosed  by  this  table  is  the  increasinff  burden 
upon  the  general  revenue  fund.  It  throws  much  light  upon  the  series 
of  deficits  m  column  4,  table  I.  The  reduction  of  the  state  levies  in 
1914  did  give  some  greater  leeway  to  localiries  within  the  inner  tax 
linuts  and  in  the  intervening  years  relief  of  this  sort  iias  been  greatly 

II.  Load  Finaiioet. 

a.  Municipalities, 

The  rate  of  increase  in  the  cost  of  local' governments  in  recent  years 
IS  very  well  shown  by  the  following  table,  prepared  by  the  state  tax 
commission.  This  table  shows  the  taxes  levied  by  the  various  local 
ievymg  districts  in  1913  and  1918,  with  the  amounts  and  percentages 
of  increase.^  ' 

TABLE  V. 


Tasle^nesby  ^918  zpz^         Increase  %Jncrease 

  128,950,245  $19,232,387  $10,717,858  58.88% 

^T't  r 10,023,932  4,963,080       5,060,852  101.96% 

^.^^'^^^    44,668,635  25,980,162      18,688,473  71  98% 

Oties  and  Villages   36,365,267  23,904,136      12,461,132  52*16% 


  $120,006,079     $73,079,764    $46,928,316  64.21+ 


The  tax  commission,  in  commenting  upon  this  table  in  1918,  was 
mclmed  to  hold  that  these  figures  established  the  elasticity  of  the  tax 
lumt  law,  and  that  a  sufficient  rate  of  local  growth  was  possible  under  it 
But  the  tax  commission  has  compiled  other  figures  for  this  committee 
which  appear  to  reveal  the  contrary  state  of  facts.  (See  Table  VI  be< 
low.)  While  some  evidence  of  local  extravagance  has  been  presented 
to  the  committee,  it  is  impossible  to  decide  out  of  hand  that  the  above 
mcreases  represent  the  price  that  is  being  paid  for  unwarrantably  ex- 

a  very  extensive  investigation 
uito  the  standards  of  local  administration  we  are  unwilling  to  accept 
such  an  explanation  of  the  increase.  We  are  convinced  that  a  thorough- 
going reform  of  local  administration  would  be  a  slow  process  in  which 
substantially  the  whole  body  politic  must  interest  itself  before  significant 
results  may  be  expected.  In  the  meantime  the  public  needs  exist  and 
must  be  met.  and  there  is  significant  evidence  to  show  that  the  above 
cost  of  local  govermnent,  great  as  it  was  in  1918,  and  great  as  was  the 


'State  Tax  Commission,  Report,  1918,  p.  15 


21 


increase  over  1913,  was  considerably  below  the  amounts  that  were  esti- 
mated to  be  necessary  by  the  various  local  officials  who  prepared  the 
budget  estimates.    The  following  table  is  compiled  for  the  purpose  of- 

comparing  the  amounts  asked  for  by  the  authorities  of  certain  districts 
and  the  amounts  allowed  by  the  budget  commissioners  in  the  process 
of  bringing  budget  estimates  within  the  requirements  of  the  tax  limit 
laws. 

TABLE  VI. 

TABLE  VI.  — EXCESS  OF  THE  AMOUNT  ASKED  TO  RE  LEVIED  OVER 
THE  AMOUNT  ALLOWED  BY  THE  BUDGET  COMMISSIONS  IN 
THE  VARIOUS  CLASSES  OF  SUBDIVISIONS  IN  SEVENTY 

COUNTIES  OF  THE  STATE: 


County  Budgets  

Township  Budgets   

City  Budgets  

Village  Budgets  r. 

City  School  Budgets  

Village  School  Budgets... 
Special  School  Budgets... 
Township  School  Budgets 


Excess 

Excess 

including  levies 

excluding  levies 

by  vote  of  the 

by  vote  of  the 

people. 

peopie* 

$2,273,674 

$2,674,627 

547,798 

559,548 

12,615,006 

12,972,950 

900,295 

921,634 

7,878,786 

14,285,789 

1,141,380 

1,604,994 

128,803 

186,440 

971,163 

1,173,163 

126,466,894 

$34,379,145 

It  is  estimated  that  the  remaining  eighteen  counties  will  increase  the  total 
approximately  12%. 

Comparative  financial  statistics  are  rather  scarce  in  Ohio,  and  the 
committee  has  made  little  effort  to  compile  material  of  this  sort.  The 
subject  was  discussed  extensively  at  our  hearings,  and  the  facts  were 
presented  at  length  and  with  great  force  by  many  of  the  local  representa- 
tives whc  appeared  before  us.  In  view  of  the  information  obtained  in 
this  way  we  have  not  undertaken  to  collect  a  large  mass  of  statistical 
data  upon  this  subject  but  we  do  venture  to  present  one  table,  compiled 
from  the  United  States  Census  Reports  on  the  Financial  Statistics  of 
Cities,  which  shows  the  governmental  cost  payments  for  the  nine  cities 
in  the  state  having  a  population  of  thirty  thousand  or  more  in  1909. 


22 


TABLE  VII -TOTAL  GOVERNMENTAL  COST  PAYMENTS   IN  THE 
NINE  OHIO  CITIES  WHICH  HAD  A  POPULATION  OF 


30.000  OR  MORE  IN  1909. 

Increase  1918 
over  1909. 


Class  of  Outlay. 

^9/5 

1Q18 

over  jp 
Amount. 

op. 

General  Government... 

$3,102,812 

$3,565,425 

$4,088,615 

1  985,803 

31.8 

Protection  to  i»erson 

and  property   

5,316,816 

5,778,785 

6,742,443 

1,425,627 

26.8 

Health  Conservation... 

326,8ir 

611,790 

1,085,211 

758,400 

232.6 

Sanitation    

1,660,878 

2,407,496 

2,803,529 

1,142,651 

68.8 

Highways   

2,512,427 

3,922,803 

3,843,123 

1,330,696 

52.9 

Oiarities,  Hospitals, 

Corrections   

1,414,417 

1,652,869 

2,133,659 

719,232 

58.8 

Education   

7,486,409 

10,486,258 

12,181,950 

4,695,541 

62.7 

Recreation   

475,710 

758,125 

650,755 

175,045 

37.0 

Miscellaneous   

229,663 

197,152 

.288,704 

59,041 

25.7 

General'  .... 

902,058 

1,099,233 

•  •  •  • 

'^'^^^^   122,525,953  $30,282,761  $34,937,222 


The  aggregate  expenditure  for  governmental  cost  purposes  of  these 
mne  ati^  rose  from  $22,574,763  in  1909  to  $30,168,239  in  1915,  and  to 
$34,937,222  m  1918,  or  33.5%  and  55.6%  respectively. 

Such  a  table  reveals  the  presence,  in  our  municipal  communities, 
of  a  very  potent  factor  which  is  every  where  operating  to  increase  public 
expenditure.    This  factor  is  the  effort  toward  a  higher  level  of  weJ 
t>emg.   The  percentage  mcreases  show  that  the  older  governmental  ac- 
tivities, such  as  the  general  administration  and  the  protection  to  life 
and  property,  have  expanded  least  rapidly  of  all  the  forms  of  public 
outlay  here  shown.    The  greatest  relative  increases  have  occurred  in 
those  forms  of  public  activity  which  now  count  much  in  the  promotion 
of  the  general  well  being^.  such  as  health  conservation,  sanitation,  educa- 
tion,  improved  highways,  charitable  and  hospital  relief  and  recreation. 
Enforced  retrenchment  in  public  outlays  now  means  the  reduction  of 
these  beneficent  social  activities  and  an  inevitable  retrogression  toward 
a  lower  plane  of  civilization. 

^   Although  some  evidence  of  waste  has  been  presented  to  the  com- 
mittee, we  cannot  consider  this  a  sufficient  explanation  of  the  problem- 
nor  IS  It  an  adequate  solution  of  the  revenue  difficulties  now  confronting 
Ohio  cities  to  advise  them  to  live  within  their  incomes.   Waste  and  ex 
travagance  are  always  bad  and  should  be  vigorously  opposed  every 
where;  but  it  would  be  a  far  easier  task  even  for  the  cities  to  live  within 


*Notc-The  last  item,  "general,"  is  not  separately  reported  in  1909. 


their  incomes  if  the  incomes  were  larger.  These  increases  in  municipal 
outlays  have  come  notwithstanding  all  of  the  resistance  offered  by  the 

taxpayers,  the  restrictions  on  the  tax  levies,  and  the  pruning  by  budget 
officials.  Some  waste  there  has  been,  in  spite  of  all  efiforts  against  it, 
but  a  democratic  government  is  quite  likely  to  be  wasteful.  There  has 
doubtless  been  some  expansion  of  the  functions  of  municipal  govern- 
ment, although  the  census  classification  does  not  permit  detailed  com- 
parisons. Without  question  too  there  has  been  an  expansion  of  the  ad- 
ministrative organization.  The  aggregate  population  of  the  nine  cities 
increased  from  1,529,345  in  1909  to  an  estimated  total  of  1,978,339  in 
1918,  while  the  aggregate  area  increased  from  117,789  acres  to  170,513 
acres  in  the  same  time.  Without  any  change  at  all  in  the  character  of 
the  public  functions  performed,  the  physical  growth  of  these  cities  would 
have  caused  an  increase  in  the  cost  of  government,  and  the  tasks  01 
supplying  these  larger  areas  with  the  services  of  government  probably 
meant  a  relatively  greater  cost  as  the  area  and  the  population  increased. 

Finally,  the  figures  given  above  and  similar  data  which  might 
have  been  compiled,  reflect  the  general  advance  in  prices,  an  advance 
which  has  affected  the  purchasing  power  of  public  as  well  as  private 
incomes.  In  view  of  these  facts  we  cannot  escape  the  conclusion 
that  much  of  the  recent  growth  of  expenditures  has  been  inevitable,  and 
that  we  are  destined  to  see  a  continuation  of  this  growth.  It  is  futile  to 
oppose  it,  for  the  maintenance  of  organized  social  life  must  and  will  go 
on.  We  ought  by  all  means  to  provide  a  sufficient  volume  of  revenue 
resources  to  insure  that  the  advantages  ^ind  benefits  of  modern  govern- 
ment shall  be  paid  for  as  they  are  received  and  enjoyed,  and  to  take 
such  measures  as  are  pojpsiblie  to  prevent  an  undue  proportion  of  their 
cost  being  shifted  to  future  generations, 
b.  Schools. 

I.   The  Common  School  System. 

"Religion,  Morality  and  Knowledge  being  necessary  to  good  govern- 
ments, schools  and  the  means  of  .education  shall  forever  be  encouraged." 
Ordinance  of  1787,  Art.  III. 

It  has  always  been  a  part  of  Ohio's  tradition,  a  part  of  which  we 
are  often  most  proud,  that  in  the  first  document  under  which  an  organ- 
ized government  was  set  over  the  territory  from  a  part  of  which  the  state 

was  later  formed,  such  an  estimate  had  been  placed  upon  the  value  of 
education  as  a  fundamental  necessity  of  good  government.  The  noble 
sentiment  expressed  in  the  Ordinance  of  1787  is  familiar  to  every 
citizen  for  it  has  been  perpetuated  in  the  constitution  from  the  very 
beginnini^  of  the  commonwealth.  The  constitution  of  185 1  reaffirmed  this 


24 


high  principle  and  there  was  written  into  that  document  as  a  mandate 
to  the  general  assembly,  for  the  realization  of  this  ideal,  the  following 
language: 

"The  general  assembly  shall  make  such  provision,  by  taxation  on  otherwise, 
as,  with  the  income  arisingr  from  tfie  school  trust  fund,  wiU  secure  a  thorough 
and  efficient  system  of  common  schools  throughout  the  state  ♦  ♦  ***. 

It  becomes  the  task  of  this  committee,  in  the  course  of  its  study 
of  the  financial  condition  of  the  state's  school  system,  to  inquire  into 
the  degree  to  which  this  ideal  is  being  realized.   We  are  not  attempting, 
as  a  result  of  this  inquiry,  to  propose  a  re-organization  of  the  school 
system,  for  this  would  carry  us  beyond  our  proper  jurisdiction  as  a  com- 
mittee on  taxation.    We  are  very  glad  to  be  able  to  say  that  we  do  not 
believe  a  general  reorganization  is  called  for,  in  order  to  secure  full 
compliance  with  the  constitutional  ideal  of  a  thorough  and  efficient  com- 
mon school  system  throughout  the  state.   In  many  respects  the  citizens 
of  Ohio  have  a  right  to  be  proud  of  their  schools.    It  is  a  matter  of 
common  knowledge,  however,  that  there  are  many  points  at  which  im- 
provement is  greatly  needed  if  our  schools  are  to  continue  to  deserve 
our  pride.   We  shall  confine  our  discussion  here  to  the  financial  aspects 
of  the  school  problem,  for  this  is  the  key  to  the  situation.  Financial  weak- 
ness is  the  cause  of  so  many  of  the  defects  which  competent  observers 
now  find  in  our  school  system  that  neither  the  committee  nor  the  general 
assembly  may  longer  neglect  it.  Many  persons  who  are  expertly  familiar 
with  the  Ohio  schools  have  appeared  before  the  committee  and  manv 
others  have  contributed  to  our  knowledge  on  this  subject.    We  are 
summarizing  here  the  case  for  further  school  support  as  it  has  been 
presented  to  us  through  these  various  and  diverse  channels.    In  this  part 
of  our  discussion  we  are  referring  to  the  grade  and  high  schools  as 
the  state  common  school  system,  as  distinguished  from  the  institutions 
of  higher  learning  which  are  also  a  part  of  the  state  educational  system. 

The  first  fact  to  be  emphasized  is  that  the  cost  of  school  main- 
tenance and  operation  has  been  steadily  and  rapidly  increasing.  Con- 
vincing evidence  on  this  point  has  already  been  presented.  The  total 
local  taxes  for  school  purposes  rose  from  $25,986,162  in  1913  to  $44,668,- 
675  in  1918,  or  71.93%.  The  total  cost  of  education  in  the  nine  largest 
cities  in  the  state  increased  62.7%  from  1909  to  1918.  And  it  is  as  true 
of  the  school  as  of  other  local  administrative  units  —  as  shown  by  Table 
VI  above  — that  the  amounts  required,  in  the  judgment  of  those  re- 
sponsible for  their  management,  were  considerably  ijx  ^cess  of  what 
could  be  allowed  under  existing  restrictive  laws. 


The  reasons  for  this  rapid  increase  in  the  cost  of  education  are 
obvious  enough.  To  begin  with,  the  total  enrollment  in  both  and  grade 
and  high  schools  has  been  increasing  steadily.  The  total  enrollment  in 
the  former  increased  14  3%  from  1890  to  1918  and  in  the  latter  266.9% 
in  the  same  time.  As  in  the  case  of  the  cities  these  mere  physical 
increases  have  inv(rfved  a  steadily  mounting  charge  for  building  and 
other  equipment,  and  in  operating  expense.  The  especially  rapid  in- 
crease in  the  high  school  enrollment  during  this  period  is  particularly 
significant  in  this  connection,  for  it  has  forced  school  districts  to  pro- 
vide a  large  number  of  high  school  buildings,  which  differ  materially 
from  the  grade  buildings  in  the  type  of  construction  and  character  of 
equipment  required.  It  is  a  fact,  too,  that  the  growth  of  high  school 
enrollment  has  carried  many  districts  past  the  capacity  of  thdr  original 
buildings  within  the  past  ten  years,  and  a  very  large  vcdtune  of  new 
school  building  construction  has  thus  been  forced  upon  them.  We  have 
just  been  passing  through  the  turning  point  of  the  original  building 
capacity  and  in  the  new  construction  the  effort  has  been  made  to  antici- 
pate the  future  requirements  for  twenty  years  or  so,  in  many  instances, 
but  this  all  adds  to  the  present  outlays  for  interest  and  sinking  funds, 
as  well  as  for  maintenance  and  operation.  In  many  other  cases,  of 
course,  the  new  buildings  were  replacements  which  were  necessary  to 
care  for  the  existing  school  enrollment. 

Another  reason  for  the  rising  cost  of  education  has  been  the  ever 
broadening  curriculimi  of  the  schools  and  especially  of  the  high  schools. 
As  new  subjects  are  added,  such  as  agriculture  and  the  physical  science$ 
upon  which  scientific  agriculture  rests,  physical  education,  and  other 
new  stibjects,  new  and  specialized  equipment  and  a  more  highly  special- 
ized teaching  staff  become  necessary. 

This  expansion  involves  increased  cost,  finally,  at  another  point, 
namely,  the  salaries  paid  to  teachers.  It  has  always  been  difficult  to 
provide  an  adequate  supply  of  properly  qualified  teachers,  and  with 
rapidly  rising,  living  costs  these  difficulties  have  been  multiplied  enor- 
mously. No  other  group  of  workers  have  stayed  by  tiieir  jobs  in  the 
if  ace  of  rising  living  costs  more  loyally  and  patriotically  than  the  school 
teachers ;  and  it  is  hard  to  find  a  group  of  workers  in  the  community  of 
whom  greater  advantage  has  been  taken,  as  a  reward  for  their  unselfish- 
ness. It  is  absolutely  essential  that  the  standards  of  compensation  in 
teaching  be  advanced,  even  if  this  does  mean  higher  school  expenses, 
for  in  no  other  way  can  the  school  protect  themselves  against  the  com- 
petition of  other  and  better-paid  fields  of  emplojrment. 

Here  again  we  seem  to  hear  some  saying  that  the  schools  ought  to 
be  required  to  live  within  their  incomes  and  that  the  garment  should  be 


I 

I 

cut  to  fit  the  cloth.  But  we  must  remind  all  persons  so  minded  that  in 
a  peculiarly  vital  and  significant  sense  the  educational  garment  may  not 
be  so  rigorously  tailored.  Our  educational  standards  liave  been  set  for 
us  —  the  pattern  of  this  particular  garment  was  laid  out  in  1787  —  it 
is  that  full  measure  of  education,  thorough  and  efficient,  reaching  out  to 
every  part  of  the  state  and  to  every  citizen  of  the  state,  which  will 
promote  good  government  and  the  safety  and  security  of  the  state.  A 
mean  and  stingy  school  financial  policy  will  produce  a  larger  crop  of 
citizens  who  are  not  intellectually  capable  of  the  duties  of  citizenship 
and  who  are,  in  consequence,  a  menace  to  the  security  of  all. 

It  is  a  simple  matter  to  ascertain  whether  proper  funds  are  now 
available,  in  all  parts  of  the  state,  to  provide  and  maintain  that  measure 
of  educational  facihties  which  in  all  fairness  must  be  regarded  as  the 
minimum,  and  in  so  doing  it  will  be  possible  to  determine  whether  the 
state  as  a  whole  is  adequately  facing  and  discharging  its  responsibility 
for  the  proper  advancement  of  the  school  system.  The  amazing  revela- 
tions of  the  literacy  tests  applied  to  the  men  called  under  the  selective 
draft  are,  in  a  way,  sufficient  to  establish  the  case.  Of  all  the  men 
examined,  700,000  in  the  nation  at  large  were  illiterate.  General  Glenn 
writes  as  follows  concerning  the  results  of  the  army  tests  as  applied  to 
Ohio  men: 

"In  Ohio  41.2%  were  illiterate  according  to  this  test,  28%  of  these  being 
negroes  and  the  balance,  or  IS.2%,  being  white;  and  in  Ross  county  I  know  that 
there  were  1100  men  rejected  for  this  cause." 

This  means  that  a  considerable  proportion  of  Ohio's  citizens  who 
went  forth  at  their  country's  call  to  fight  for  democracy  had  been 
deprived  of  the  most  elemental  privilege  which  our  organic  law  guaran- 
tees to  every  citizen. 

It  is  our  especial  concern,  in  this  report,  to  examine  the  state's  share 
of  responsibility  for  this  condition,  in  order  to  determine  what  shall  be 
the  state's  obligation  in  its  correction.  Our  policy  of  school  manage- 
ment has  been  a  curiously  divided  one  in  the  past.  The  chief  sources 
df  revenue  for  school  purposes  have  been  local,  and  we  have  not  hesi- 
tated to  permit,  even  to  encourage,  a  vicious  gerrymandering  of  school 
districts  with  no  regard  whatever  to  tlie  relations  of  needs  and  resources 
in  the  great  multitude  and  variety  of  districts  thus  set  up.  The  state 
has  contributed  for  local  use  a  sum  equal  to  $2.00  for  each  enumerated 
youth  of  school  age,  and,  more  recently,  an  additional  amount  approxi- 
mately equal  to  50%  of  the  salaries  of -the  district  and  county  super- 
intendents. This  school  fund,  which  is  the  extent  of  the  state's  con- 
tribution to  common  school  support,  is  distributed  to  all  districts  with- 
out regard  to  the  needs  of  the  several  districts.    In  1906  the  policy  of 


27 


additional  aid  to  so-called  weak  school  districts  was  inaugurated.  This 
aid  has  been  meager  enough,  but  the  conditions  which  were  to  exist  in 
a  district  before  such  aid  could  be  obtained  were  so  hard  as  to  exclude 

many  localities  the  scliools  of  which  were  really  in  serious  need  of  addi- 
tional support  in  order  to  operate  properly.  The  state  has  never  pur- 
sued an  effective  policy  of  state  support  of  schools,  for  the  aggregate 
disbursements  under  both  of  these  funds  has  never  exceeded  $3,000,000. 

The  policy  of  more  or  less  complete  local  support  of  schools  is  in 
reality  a  very  unfair  method  of  distributing  the  cost  of  modem  educa- 
tion. The  relative  cost  of  a  certain  standard  of  education  is  just  as 
great  in  the  poor  or  weak  district  as  it  is  in  the  strong  one.  All  dis- 
tricts are  required  to  .bring  their  children  up  to  this  minimum  standard, 
because  these  children,  all  together,  from  the  weak  and  the  prosperous 
districts,  shall  one  day  be  the  state.  Men  are  no  longer  bound  for  life 
to  the  township  of  their  birth,  and  with  the  mobility  of  modem  life 
the  children  from  the  hill  counties  join  the  workers  and  the  electorate 
of  the  large  cities.  The  responsibility  for  a  proper  educational  mini- 
mum for  all  citizens  cannot  longer  be  avoided  by  tlic  stale,  for  even  with 
much  higher  levies  for  school  purposes  than  arc  now  possible  under  the 
law,  it  would  be  very  difficult  in  some  districts  to  provide  the  necessary 
educational  equijMnent  and  teaching  force.  These  districts  are  simply 
too  poor  to  provide,  unassisted,  that  educational  minimum  which  all 
citizens  of  the  state  should  possess. 

The  situation  in  the  weak  school  districts  illustrates  the  dangers 
ind  the  injustice  of  our  present  ])olicv  of  excessive  reliance  upon  local, 
revenues  for  school  support.  Sections  7595-7597  of  the  General  Code 
define  a  weak  school  district  as  one  which  is  unable  to  pay  its  teachers 
a  salary  of  $60  per  month*  for  eight  months,  after  the  maximum  legal 
school  levy  has  been  made,  three-fourths  of  which  shall  have  been  as- 
signed to  the  tuition  fund.  No  such  district  shall  be  entitled  to  aid  un- 
less the  number  of  pupils  of  school  age  in  the  district  is  at  least  twenty 
times  the  number  of  teachers  employed  therein. 

:rhese  are  pitifully  low  standards,  but  in  1918  there  were  245  sclioo: 
districts  in  27  counties  which  could  not  comply  with  them  and  which 
received  state  aid.  These  districts,  with  three  exceptions,  would  all  li" 
south  of  a  line  drawn  from  New  Philadelphia  through  Columbus  to 
Batavia  In  many  of  these  districts  levies  of  from  six  to  eleven  mills 
had  been  made  and  yet  state  aid  proved  necessary.  In  some  cases  this 
means  that  the  fauU  was  with  the  district  boundary  lines,  a  defect  which 
the  general  assembly  has  had  abundant  opportunity  in  recent  years  to 
correct.  But  in  many  other  instances  these  facts  emphasize  the  defects 
of  our  policy  of  local  responsibility  for  the  great  bulk  of  school  cost. 


28 


Furthermore,  there  are  many  other  school  districts  in  the  state  whicli 
have  been  seriously  handicapped  financially,  but  which  were  beyond  the 
absurdly  low  minima  set  up  in  section  7595.  This  section  preserves  the 
salary  standards  of  a  generation  age,  and  many  districts  which  in  reality 
are  little  stronger  than  the  state  aid  districts  have  had  to  pay  more  than 
$60  or  get  no  teachers.  Even  m  the  case  of  some  of  the  larger  cities, 
where  living  costs  are  higher,  the  proportion  of  the  school  budget  that 
has  necessarily  been  spent  on  salaries,  in  order  to  have  teachers  at  all, 
has  reduced  the  amounts  available  for  the  building  program  to  such  a 
pomt  that  very  unsanitary  and  unwholesome  arrangements  have  been 
made  for  a  part  of  the  school  population.  Basement  rooms,  portable 
rooms,  overcrowded  rooms,  inadequate  heating,  lighting  and  toilet  facil- 
ities—shortcomings of  these  and  other  sorts  have  been  freely  cited  to 
us  by  those  who  have  appeared  in  behalf  of  the  school  system. 

FinaUy,  in  all  districts  the  schools  have  suffered  especially  under 
the  burdensome  restrictions  imposed  by  the  tax  limit  law  of  igii.  We 
have  discussed  below  the  very  obvious  defects  of  this  measure  but  we 
must  point  out  here  one  further  significant  aspect  of  it.    The  stale  has 
not  only  set  up  the  policy  that  the  resources  of  the  district  shall  bear 
practically  the  whole  co.<it  of  education ;  it  has  at  the  same  time  imposed 
severe  and  rigid  limits  on  the  tax  rates  which  may  be  levied  on  the 
property  of  the  district  for  school  purposes.    Theoretically  the  city  go^•- 
emment  and  the  school  board  are  entitled  to  five  mills  each,    but  poe- 
tically this  is  seldom  possible  for  both  at  the  same  time  because  certain 
state  levies  and  the  county  levies  must  come  out  first.   If  either  the  city 
council  or  the  school  board  creates  debt  without  proper  approval  the  inter- 
est and  sinking  fund  charges  for  such  issues  are  also  deducted  and  the 
revenue  of  the  other  unit  is  thereby  impaired.   City  councils,  as  the  more 
active  political  bodies,  are  more  likely  than  school  boards  to  indulge  in 
such  issues,  and  the  latter  are  obliged  to  accept  the  cuts  thereby  involved. 

Moreover, -notwithstanding  ail  of  these  negative  or  restrictive  aspecib 
of  the  state  policy,  there  has  been  a  development  of  the  other  side  of  the 
general  educational  policy,  which  is  the  state  control  of  the  standards  ot 
the  school  system.  We  have  had  an  increasing  extension  of  state  control 
over  the  standards  of  sanitary  and  other  equipment,  of  the  standards  of 
building  construction,  of  the  qualifications  of  teachers,  of  the  content  of 
curriculum,  and  various  other  phases  of  school  operation.  For  instance, 
ihe  chancres  m  the  school  building  code  since  the  Collinwood  disaster 
have  added  at  least  one-third  to  the  cost  of  building;  there  is  now  in 
operation  a  sliding  scale  of  professional  training  required  for  certifica- 
tion of  teachers  which  by  192 1  will  require,  at  least  one  year  of  such 


29 

training  of  all  candidates  for  ct>unty  certificates.   Agriculture,  physical 

training  and  other  specialized  subjects  are  also  prescribed.  In  other 
words  the  state  has  been  steadily  adding  to  the  cost  of  education  by  this 
advance  in  the  level  of  its  standards  but  it  has  been  restricting,  pari 
passu,  the  financial  ability  of  the  school  districts.  Between  the  upper 
and  nether  millstones  the  school  system  is  being  crushed. 

The  remedy  is  simple  enough.  We  do  not  deprecate  the  advance  in 
the  standards  of  instruction  and  equipment.  On  the  other  hand  we  wel- 
come them  as  the  signs  of  progress.  But  as  these  standards  advance  it 
must  be  made  ]>ossible  for  the  school  administrative  authorities  to  keep 
pace  with  them  in  securing  larger  funds  for  school  maintenance  and 
operation.  In  some  instances  this  may  be  done  by  the  reorganization  ot 
school  district  lines ;  in  others  a  greater  freedom  to  authorize  additional 
levies  for  school  purposes  would  be  desirable  and  would  be  gladly  wel- 
comed. We  have  recommended  the  extension  of  the  policy  of  S.  B.  187 
by  incorporating  it  in  our  school  relief  bill.  But  in  addition  to  these 
measures  there  must  be  for  all  school  districts  a  greater  recognition  of 
the  state's  obligation  for  the  proper  support  of  education.  The  obliga- 
tions of  citizenship  are  statewide  and  the  training  for  citizenship  must  be 
statewide.  Our  pian  of  school  relief  contemplates  the  recognition  of  the 
state's  share  in  this  responsibility  by  the  provision  for  a  levy,  uniform 
throughout  the  state,  which  shall  provide  a  fund  for  the  better  support 
of  common  schools.    The  details  of  this  plan  are  presented  below. 

2.    The  State  Universities. 

The  higher  institutions  of  learning  are  suffering  from  the  general 
financial  difficulties  also,  though  the  reasons,  obviously,  are  not  at  all 
points  the  same  as  in  the  case  of  the  common  schools.  The  principal 
sources  of  university  revenues  have  been  the  legislative  appropriations, 

supplemented  by  such  income  as  may  have  been  received  from  land 
grants  and  other  sources.  Nominal  fees  are  charged  to  students  but  it 
has  always  been  a  part  of  our  university  policy  that  the  benefits  ot 
higher  education  shall  be  afforded  10  the  citizens  of  the  state  without 
tuition  charge.  In  view  of  the  condition  of  the  state  finances  it  may  be 
proper  to  consider  a  change  in  this  policy  but  we  are  not  now  recom- 
mending it. 

The  university  needs  are  threefold  —  First,  higher  salaries  for  the 
teaching  and  administrative  personnel,  an  absolute  necessity  unless  we 
are  content  to  see  all  of  the  best  men  of  our  state  university  faculties  mi- 
grating to  private  employment  or  to  other  institutions.  The  very  alarming 
exodus  from  the  Ohio  State  University  last  summer  indicates  that  this 
possibility  is  always  real  when  salaries  are  inadequate,  and  a  moment's 
reflection  will  convince  any  thinking  person  that  such  a  condition  pro- 


30 


duces  a  frame  of  mind  that  is  disastrous  to  morale  and  efficiency.  The 
second  need  is  for  increased  provision  for  operation  and  maintenance. 
This  requirement  is  only  natural  in  *view  of  the  general  increase  in 
operating  and  maintenance  costs  everywhere.  The  state  has  a  consider- 
able capital  investment  in  its  university  plants  and  the  best  educational 
interests  of  the  state,  as  well  as  the  dictates  of  a  selfish  business  policy, 
require  that  proper  provision  be  made  for  the  maintenance  and  operation 
of  these  plants.  The  third  need  is  the  capacity  for  expansion.  Esti- 
mates have  been  submitted  to  the  committee  based  on  population  and 
school  enrollment  data,  to  show  that  by  1929-30  Ohio  colleges  and 
universities  will  be  obliged  to  provide  for  37,000  students.  Of  this 
number  it  is  estimated  that  from  13,000  to  16,000,  or  35%  to  43%,  will 
be  enrolled  in  state  institutions.  Many  of  the  privately  endowed  colleges 
and  universities  are  already  near  the  limits  of  their  enrollment  capacity 
and  they  cannot  raise  these  limits  materially  without  very  great  increases 
in  endowment.  The  state  must,  therefore,  prepare  to  assume  the  steadily 
increasing  burden  of  providing  higher  education  to  all  who  are  fitted  for 
it  and  ambitious  to  obtain  it.  The  rapid  increase  in  high  school  enroll- 
ment is  the  best  confirmation  of  these  calculations,  and  we  are  urging 
that  a  broad,  generous  view  be  taken  of  the  educational  future  of  the 
state. 

Various  estimates  of  the  outlays  required  have  been  presented.  The 
following  summary  of  needs  for  all  state-supported  institutions  was  pre- 
pared for  the  committee  by  President  O.  M.  Hughes,  of  Miami  Uni- 
versity : 

TABLE  VIII.   PROBABLE  BUDGET  OF  HIGHER  EDUCATION  IN  OHIO 

DURING  THE  NEXT  TEN  YEARS. 

■ 

Personal  Sen/ice 

and  Maintenance   Buildings  Total. 

$115,741  $2,356,134 

1,000,000  4,375,000 

1,000,000  4,625,000 

1,000,000  4,875,000 

1,000,000  5,125,000 

1,000,000  5,375,000 

1,000,000  5,625,000 

1,000,000  6,875,000 

1,000,000  6,125,000 

1,000,000  6,375,000 

1,000,000  6,625,000 

President  Hughes  adds,  in  comnient  upon  the  figures  here  presented: 
^The  above  figures  seem  large.   They  are.   But  so  is  OHIO !  So 
are  the  sums  onr  states  and  communities  are  called  upon  to  expend  year 


1^19-20    $2,240,393 

1920- 21    3.375,000 

1921- 22    3,625,000 

1922- 23   3,875,000 

1923-  24    4,1-36,000 

1934-25    4,375,000 

1925-  20   4,625,000 

1926- 27   4,875,000 

1927-  28    5,125,000 

1928-  29    5,375,000 

1929-  30    5,625,000 


after  year,  to  pay  the  price  of  inefficiency,  tuitrained  leadership,  and  ari 
uiiinfornied  electorate.  Ohio  in  1929-30  should  have  a  population  of 
six  million  people.  This  enormous  outlay  for  education  will  represent 
almost  exactly  one  dollar  per  capita !  Study  the  tables  and  estimates  in 
detail,  and  it  is  apparent  that  these  figures  are  not  extravagant.  They  are 
extremely  conservative.  They  represent  the  least  Ohio  can  do  and  main- 
tain her  proper  position  in  the  educational  activities  of  the  nation.  Our 
people  believe  in  higher  education ;  they  certify  to  that  by  the  way  they 
are  taking  advantage  of  it.  Are  they  not  willing  to  pay  for  what  they 
want  ?" 

Officials  of  Ohio  State  University  have  submitted  a  projected  budget 
for  the  next  five  years  which  calls  for  outlays  for  personal  service  and 
maintenance  only,  rising  from  $1432,030  in  1919-20  to  $2,635,416  in 
1924-25.  This  does  not  take  into  account  the  building  program,  to  which 
reference  is  made  above. 

The  principal  suggestion  which  has  been  offered  by  the  university 
officials  for  providing  these  increased  funds  is  that  some  specified  or 
designated  sources  of  income,  or  amounts  of  income,  be  set  aside  for 
university  use.  The  necessity  of  depending  absolutely  upon  the  ap- 
propriations made  biennially  necessarily  compels  a  short-run  view  of 
their  problems  and  bars  that  careful  long-range  elaboration  of  policy 
which  is  conducive  to^true  economy  of  management. 

III.   The  Increase  of  Local  Debts. 

The  most  striking,  and  in  some  ways  the  most  convincing  evidence 
of  the  hiatus  between  local  revenues  and  expenditures  is  found  in  the 
very  rapid  increase  of  local  debts  in  recent  years.   The  aggr^te  local 

debt  for  all  purposes  since*  1900  as  reported  by  the  auditor  of  state  is 
shown  in  the  following  table: 

TABLE  IX.   TOTAL  LOCAL  DEBT  FOR  CERTAIN  YEARS  SINCE  1900. 
Year.  Total  Local  Debt. 

1900   $96,193,513 

1910  .   187,574,322 

1915   -.   356,028.968 

1918   434,047,798 

This  rate  of  increase  is  indeed  startling  and  with  all  due  allow- 
ance for  the  misleading  character  of  the  figures  the  local  debt  situation 
may  be  regarded  as  critical.  We  have  pursued  a  policy  of  comparative 
indifference  to  the  rate  of  debt  creation,  but  of  rigid  restriction  upon 
the  ability  of  a  community  to  pay  off  its  debts,  and  it  is  small  wonder  if 
the  public  credit  of  such  a  community  is  impaired  in  the  outside  financial 


i2 

toitcrs.    to  the  extent  that  public  credit  is  thus  impaired  this  condi 
tion  would  be  reflected  in  a  discrimination  against  its  bonds  which  would 
increase  the  burden  on  the  local  taxpayers. 

It  is  not  to  be  understood,  however,  that  the  whole  of  the  above 
local  debt  constitutes  a  burden  upon  the  taxpayers,  and  in  this  respect 
we  have  characterized  the  figures  as  misleading.    The  real  extent  of 
the  debt  burden  would  be  better  shown  if  a  distinction  were  made  be- 
tween the  debt  which  is  self-sustaining  and  that  which  is  not.    That  is, 
we  should  be  able  to  separate  the  bonds  issued  by  self-sustaining  public 
utilities  and  on  account  of  special  improvements  to  property,  from  those 
which  constitute  a  direct  charge  against  the  general  tax  revenues. 
Further,  a  correct  debt  analysis  would  show  the  amount  of  bcmds  which 
had  been  issued  for  the  purpose  of  funding  floating  deficits  and  for 
refunding  earlier  issues.    The  latter  would  be  a  burden  on  the  taxpayers 
of  course,  unless  they  were  refunded  by  a  public  utility,  but  we  cannot 
form  an  accurate  judgment  of  the  bond-issuing  habits  of  a  community 
without  knowing  more  of  the  circumstances  than  are  given  us  in  the 
above  figures,  or  than  is  presented  by  the  auditor  of  state  in  his  discus- 
sion of  the  subject  of  local  indebtedness  in  his  annual  report  for  1917 
It  is  not  our  purpose  to  defend  the  local  debt  situation;  on  tiie  contrary, 
we  believe  the  situation  to  be  sufficiently  serious  to  warrant  more  ef- 
fective measures  being  taken  to  control  debt  issue  and  to  provide  for 
the  reduction  of  the  present  volume  of  outstanding  debts.    We  do  be- 
lieve, however,  that  a  distinction  should  be  set  up  that  will  show  the 
difference  between  self-sustaining  and  non-self-sustaining  debt,  and  that 
the  true  measure  of  the  local  debt  burden  is  the  pressure  of  the  latter 
class.   We  are  recommending  the  submission  of  a  constitutional  amend- 
ment for  the  control  of  debt  issue,  and  discussion  of  the  details  of  this 
plan  is  found  in  chapter  IV  below. 


CHAPTER  III. 

Some  Features  of  the  Existing  Revenue  System. 

A  complete  analysis  of  Ohio's  present  revenue  system  is  unneces- 
sary in  the  present  connection,  and  especially  so  since  the  committee  has 
not  undertaken  a  general  reorganization  of  that  system.  It  will  be  of 
advantage,  however,  to  comment  briefly  upon  certain  outstanding 
features,  the  selection  of  which  is  governed  somewhat  by  the  recom- 
mendations later  to  be  presented.  In  a  certain  ^ense  these  may  be  said 
to  be  the  weaker  phases  of  our  tax  system.  At  any  rate  they  are  the 
points  at  which  it  has  appeared  to  be  most  obviously  of  advantage  to 
begin  the  work  of  reconstruction. 

I.   Tbe  Separation  of  Revenue  Sources. 

The  basis  of  the  Ohio  Revenue  system  is  of  course  the  general 
property  tax.  During  the  second  half  of  the  19th  century  both  the  state 
and  the  local  subdivisions  drew  their  main  support  from  this  source. 
The  administrative  system  was  decentralized  and  therefore  weak,  and 
such  serious  inequalities  had  come  to  exist  in  the  distribution  of  the  state 
tax  levy  on  property  that  when,  toward  the  close  of  the  century,  the 
plan  of  separating  the  sources  of  state  and  local  revenues  appeared,  it 
was  welcomed  as  the  final  solution  of  all  fiscal  difficulties  and  problems. 
As  this  plan  was  worked  out  in  Ohio,  the  property  tax  was  relegated 
to  the  local  units  and  the  state  direct  levy  on  property  was  greatly  re- 
duced and  finally  abandoned  as  a  source  of  revenue  for  general  state 
purposes.  On  the  other  hand  the  state  built  up  various  other  sources 
of  revenue,  chief  of  which  have  come  to  be  tiie  different  excise  and 
other  taxes  on  corporations,  the  inheritance  tax,  and  until  recently,  the 
liquor  license  tax.  The  principle  of  separation  of  revenue  sources  has 
gained  very  general  acceptance  throughout  the  state  and  we  readily 
grant  the  value  of  every  argument  which  might  be  advanced  in  favor  of 
continuing  this  policy.  We  are  not  prepared  at  this  time  to  present  an 
exhaustive  argument  either  for  or  against  the  plan  which  has  become 
such  an  integral  part  of  state  policy,  and  in  what  follows  there  is, 
therefore,  no  thought  of  going  further  than  to  suggest  certain  rather 
obvious  considerations  which  bear  on  the  case.  In  the  present  judgment 
of  the  committee  these  considerations  point  toward  a  modification  of  this 
policy,  and  in  this  respect  the  committee's  proposals  are  perfectly  con- 

33 


34 


sistent  with  earlier  acts  of  the  legislature,  acts  which  can  only  be  in- 
terpreted as  an  admission  of  the  unsatisfactory  operation  of  the  separa- 
tion plan.  The  Hite  Road  Law  of  191 3  is  a  case  in  point.  Our.  brief 
analysis  of  the  state  revenues  confirms  this  view  of  the  effects  of  separa- 
tion upon  the  state's  finances. 

The  first  consideration  to  be  noted  is  that  separation  of  sources 
has  not  solved  automatically  all  of  the  administrative  problems  of  the 
assessment  and  equalization  of  property.  As  noted  above  the  diffi- 
culties earlier  encountered  in  the  assessment  of  property,  especially 
real  estate,  and  its  equalization  at  ten-year  intervals  for  the  distribu- 
tion of  the  state  tax,  were  so  great  as  to  appear  impossible  of  proper 
solution.  But  the  support  of  the  state  government- from  indirect 
taxes  has  not  reheved  the  state  of  the  task  of  supervising  the  assess- 
ment and  equalization  of  property.  After  the  separation  program 
was  in  operation  the  state  created  a  state  tax  commission  and  en- 
dowed it  with  extensive  powers  of  supervision  and  control  over  local 
assessors,  and  in  one  experiment  the  entire  process  of  local  assess- 
ment was  placed  under  central  control.  The  present  legislature  has 
extended  the  commission's  powers  in  the  assessment  of  real  property 
and  the  decisive  defeat  of  the  fNToposed  classification  amendment  can 
only  be  interpretod  to  meui  a  popolar  willingness  to  see  this  adminu- 
tmnre  control  atrengtheBed  aBd  eKtended,  especially  in  the  directimi 
ol  secnmg  a  more  substantial  asaessment  of  peraenal  property.  It 
appears  from  this  that  Ohio  has  really  been  obliged  to  develop  precisely 
the  same  type  of  central  tax  administration  that  has  been  developed  in 
those  states  which  have  not  embraced  the  policy  of  separation  of  sources. 
It  follows,  too,  that  with  such  administrative  development,  the  effect 
of  local  competitive  under-valuation  and  evasion  can  be  quite  successr- 
fttlly  neutralized  so  far  as  undesirable  shifting  of  tax  burdens  is  con- 
cerned. The  experience  of  Wisconsin  and  Massachusetts  in  distributing 
equitably  a  fairly  heavy  direct  state  tax  is  conclusive  on  this  point 
There  need  be  no  hesitation,  therefore,  over  the  committee's  plan  for 
school  relief  which  is  presented  below,  on  such  grounds  as  might  have 
been  urged  twenty  years  ago,  for  we  have  in  the  meantime  set  up 
adequate  administrative  machinery  for  the  control  of  those  defects  in 
the  state  levy. 

A  further  point  for  consideration  relates  to  what  may  be  called, 
for  want  of  a  better  name,  the  fiscal  adequacy  of  the  program  of  sepa- 
ration, especially  from  the  standpoint  of  the  state  revenues.  By  this 
we  mean  to  raise  the  question  whether  the  indirect  revenues  upon  which 
the  state  is  at  present  so  largely  relying  are  sufl&ciently  adequate  and  elas- 
tic to  permit  the  state  to  assume  certain  obligations  which  are  dearly  in 


35 


the  nature  of  state  functions.  The  analysis  of  the  state  revenues  which 
was  presented  above  makes  fairly  certain  a'  negative  answer  to  both  tests 
— radequacy  and  elasticity.  Wliile  the  receipts  from  the  indirect  taxes 
have  increased  notably  in  recent  years  they  are  not  sufficient  today  to 
cover  the  present  cost  of  the  state's  functions  to  to  permit  of  an  increase 
of  the  scale  on  which  the  state  is  now  supporting  public  education  and 
other  important  activities.  It  is  useless  to  expect  the  state  will  be  able  to 
expand  its  activities  or  to  conduct  its  present  operations  on  a  more  ample 
scale  from  the  existing  indirect  sources  of  state  revenue. 

As  little  may  be  expected  of  these  resources  in  the  way  of  elasticity. 
The  yield  of  the  taxes  on  corporations  is  a  resultant  of  two  factors,  the 
rate  and  the  volume  of  business,  of  capital  stock  or  other  basis  of  levy. 
Frequent  adjustments  of  rates  would  prove  very  unsatisfactory  to  the 
state  as  well  as  to  the  taxpayers  concerned,  and  if  experience  in  other 
states  is  of  any  significance,  it  will  not  always  be  an  easy  matter  to  work 
out  equitable  readjustments  of  this  sort.  The  volume  of  business  or  of 
capital  stock  is  not  within  the  state's  power  to  control,  and  the  yield  of 
such  taxes  is,  in  consequence,  relatively  inelastic.  It  cannot  easily  be 
expanded  to  permit  that  broadening  of  the  state's  fiscal  activities  which 
normal  growth  and  varying  conditions  often  require.  In  the  effort  to  re- 
lieve the  state  of  certain  evils  inherent  in  the  older  administrative  sys- 
tem it  now  appears  fairly  clear  that  the  sources  of  state  revenue  were 
unduly  restricted,  while  there  proved  to  be  no  escape  from  the  adminis- 
trative obligations  involved. 

It  does  not  appear  possible  to  supplement  the  existing  sources  of 
state  revenue  by  other  indirect  taxes  which  will  give  to  the  state's  rev- 
enues that  amplitude  and  elasticity  which  are  essential  to  progress.  The 
two  taxes  to  which  attention  would  naturally  be  turned  in  this  connec- 
tion are  the  inheritance  and  income  taxes,  but  it  must  be  remembered 
that  the  constitution  expressly  provides  that  at  least  50%  of  the  proceeds 
of  these  taxes  must  be  returned  tathe  districts  of  origin.  Further,  while 
a  marked  increase  *may  be  expected  from  the  inheritance  tax  as  revised 
by  the  present  general  assembly,  it  must  be  said  that  there  is  a  general 
tendency  to  over-rate  the  fiscal  possibilities  df  these  taxes.  Through  a 
period  of  years  the  inheritance  tax  becomes  a  fairly  dependable  revenue 
producer,  but  its  yield  in  a  given  year  is  highly  uncertain  and  until 
experience  has  been  accumulated  it  is  impossible  to  foretell  the  returns 
from  the  present  inheritance  tax.  There  is  a  belief  in  some  quarters  that 
the  income  tax  will  not  prove  notably  successful  when  in^sed  in  ad- 
dition to  the  general  property  tax,  yet  this  situation  confronts  us  at  the 
present  time  in  the  use  of  the  income  tax  in  Ohio.  Your  committee 
ur^es,  therefore,  that  the  whol^  situation  be  faced  with  an  open  mind 


36 


and  that  no  pre-conceived  or  academic  preference  for  the  policy  of 

separation  be  permitted  to  interfere  with  any  further  modifications  of 
that  policy  which  may  be  rendered  necessary  in  the  present  emergency. 

IL  Tlie  tax  limit  law. 

Sections  5649-1  to  5649-6  inclusive  contain  the  provisions  for  the 
limitations  of  tax  rates.  These  sections  were  originally  enacted  in  1910 
(loi  O.  L.  430)  in  connection  with  the  general  revaluation  of  the  state 
which  was  undertaken  in  that  year.  The  depreciated  basis  of  valua- 
tion, which  had  become  universal  during  the  period  of  ineffective  local 
adtmnistration  of  assessments,  had  naturally  produced  very  high  tax 
rates,  amounting  in  some  instances  to  50  or  more  mills  on  the  dollar. 
The  decennial  reappraisal  of  real  property  in  1910  was  made  the  occasion 
of  a  thorough  revision  of  assessments,  and  while  this  revision  was  in 
process  the  state  tax  commission  was  created  and  given  supervisory 
jurisdiction  over  the  work  of  local  assessors  and  boards  of  review.  It 
replaced  also  the  very  ineflficient  state  board  of  equalization  and  in  this 
capacity  it  was  required  to  equalize  the  real  estate  assessments,  which 
were  then  to  stand  for  four  years  instead  of  ten  is  had  been  the  case 
since  i860.  It  was  a  natural  and  necessary  part  of  this  sweeping  change 
in  the  basis  of  valuation  and  in  the  administrative  procedure  that  the 
level  of  tax  rates  which  had  become  customary  under  the  old  regime  be 
reduced  to  a  plane  of  conformity  to  the  changed  valuations  of  property. 
The  original  tax  limit  law  of  1910  was  not  enacted  until  after  the  assess- 
ment of  that  year  was  practically  completed,  so  that  it  was  of  little 
influence  in  determining  the  basis  of  assessment.  As  originally  drawn 
its  limitations  were  not  entirely  clear  and  administrative  features  were 
lacking,  and  substantial  amendments  were  added  in  191 1.  A  budget 
commission,  so-called,  was  set  up  in  each  county  but  this  term  is  really 
a  mis-nomer,  for  the  budget  commissions  neither  prepare  local  budgets 
nor  assist  in  their  preparation.  Their  sole  function  is  that  of  securing 
tedmical  compliance  with  the  provisions  of  the  tax  limit  law,  and  to 
that  end  they  are  empowered  to  "adjust  the  various  amounts  to  be 
raised  so  that  the  total  amount  thereof  shall  not  exceed  in  any  taxing 
district  the  sum  authorized  to  be  levied  therein." 

The  wisdom  of  the  general  policy  of  tax  rate  reduction  in  connec- 
tion with  a  general  advance  in  assessed  valuation  cannot  be  questioned. 
Some  sort  of  legislation  to  secure  this  result  was  absolutely  essential  if 
confiscatory  tax  levies  and  local  extravagance  were  not  to  follow.  The 
above  sections  represent,  from  this  point  of  view,  a  very  serviceable 
method  of  protecting  the  taxpayer  during  the  transition  from  a  very 
low  and  unequal  basis  of  valuation  to  a  much  higher  and  probably  more 


37 


equitable  valuation.  There  was  no  especially  inherent  merit  in  the  par- 
ticular tax  rates  adopted  as  the  timits,  and  the  principal  criticisms  which 
may  now  be  offered  against  the  whole  tax  limit  plan  of  1910  rest  upon 
the  tendency  to  regard  as  of  enduring  worth  and  significance  a  measure 
which  was  really  designed  to  effect  certain  temporary  ends.  The  specific 
criticisms  which  are  here  brought  against  the  Smith  tax  limit  law  are 
not  intended  so  much  as  criticisms  of  the  general  principle  of  tax  rate 
limitations  as  of  the  particular  form  of  tax  limitations  embodied  in 
sections  5649-1,  ff. 

1.  In  the  first  place  we  desire  to  cmpiiasixe  tiie  fact  tiiat  thei^* 
is  no  inliereiit  reasonableiiess  in  the  particular  rates  set  op  as  the 
fimitft.  The  propsr  basis  for  the  selection  of  these  fijures  in  1910 
and  1911  was  that  such  maximum  rates,  applied  to  the  increased 
valuations  of  those  years,  would  produce  approximately  the  sane 
public  revenue  as  the  old  rates  had  produced  on  the  old  valnaiio*is 
These  rates  were  only  an  approximation  at  that  time  and  it  was  con- 
sidered necessary  in  1910,  for  the  purpose  of  further  checking  extrava- 
gance, to  insert  a  schedule  of  aggregate  revenue  increases,  whereby  the 
total  taxes  levied  for  191 1  were  not  to  exceed  the  total  for  1910,  plu:> 
6%  thereof  for  1912,  plus  9%  thereof  for  1913,  and  12%  thereof  for 
any  years  thereafter.  This  schedule  was  removed  in  19 13  in  recogni- 
tion of  its  temporary  character  and  this  removal  was  in  reaUty  an  ad- 
mission of  the  temporary  character  of  the  whole  scheme. 

2.  The  interior  limitations,  as  they  are  called,  are  arbitrary  an«1 
very  often  produce  serious  inf^^stice  as  among  the  various  levying  dis- 
tricts. Here  again  it  now  appears  fairly  clear  that  the  limits  of 
5-5-3-2  mills  for  cities,  school  districts,  counties  and  townships  re-^pect- 
ively.  were  not  experimentally  determined  but  were  written  into  the  law 
without  regard  to  the  requirements  of  these  several  administrative  dis- 
tricts. Furthermore,  certain  levies  which  the  state  has  imposed  must 
be  so  included,  as  it  must  be  also  all  interest  and  sinking  fund  charges 
on  debts  incurred  without  popular  vote.  Since  the  state  levies,  the  county 
levy  and  the  debt  charges  are  really  preferred  claims  within  the  ten- 
mill  limit,  it  often  results  that  the  actual  limit  on  school  and  municipal 
taxes  is  very  much  less  than  five  mills  each,  and  so  these  districts  are 
made  to  suffer  through  no  fault  of  their  own.  Nor  can  they,  by  the 
most  careful  management,  avoid  the  restrictions  which  may  thus  be  im- 
posed upon  the  levies  which  the  law  apparently  meant  to  authorize. 

3.  The  method  of  controlling  expenditures  by  a  flat  limitation 
applied  to  the  whole  state  is  too  rigid,  too  mechanical,  and  has  not 
really  resulted  in  protecting  the  taxpayers.  If  the  total  tax  rate  of 
a  district  is  not  now  in  excess  of  the  original  limits  it  is  a  fairly  good 


38 


indication  that  the  activites  of  this  district  are  not  such  as  to  require 
large  expenditures.  A  ligidy  flat  limitation  on  the  tax  rates  to  be 
Ivvied  by  all  districts  asmnw^  that  the  reimireincnts  of  all  districts 
are  iiipuMlimr  at  about  the  same  rate,  and  neglects  absolntely  the  fact 
thcw  diose  dBstricts  which  are  comparatively  new  but  which  are  grow- 
ing rapidly  in  population,  such  as  the  newer  industrial  centers,  may 
have  an  entirely  different  scale  of  requirements  which  must  be  met 
speedBly,  than  some  of  the  older  and  more  slowly  developing  com- 
mwiitiii  i  It  neglectsv  too^  the  vast  difference  between  the  require- 
ments of  rural  and  urban  communities  and  seeks  to  set  up  a  common 
standard  of  tax  burden  for  all. 

4.  Further,  the  excessive  emphasis  upon  tax  rate  limitations 
which  has  followed  the  exaltation  of  the  Smith  Law  has  led  to  a 
corresponding  indifference  to  the  facts  relating  to  the  creation  of 
debts,  when  as  a  matter  of  sound  financial  practice  the  extremity  of 
emphasis  should  be  upon  the  debt  limit  rather  than  upon  the  tax  limit. 
It  has  generally  been  found  to  be  true  that  when  debt  limits  and  tax 
limits  conflict  the  former  yield  first  for  the  simple  reason  that  people 
naturally  prefer  to  postpone  the  day  of  payment  and  are  inclined  to 
take  full  advantage  of  such  opportunities  as  are  afforded  them  by 
weak  debt  limits.  The  very  rapid  increase  of  local  debts  in  Ohio 
in  recent  years  has  doubtless  been  due  in  part  to  the  severe  restric- 
tions pat  upon  the  tax  rates.  Not  an  inconsiderable  part  of  the 
total  r^resents  funding  bonds,  issued  to  cover  accumulated  shortages 
in  current  funds  for  operating  expenses.  The  wide  margin  of  5 
mills  for  the  interest  and  sinking  fund  charges  of  authorized  debt 
issues,  in  contrast  with  the  restricted  total  of  ten  mills  for  all  oper- 
ating expenses  and  unvoted  debt  charges  is  really  an  invitation  to 
indulge  in  debt  financiering.  It  has  been  a  simple  enough  matter,  as 
the  practices  of  some  municipalities  have  shown,  to  accumulate 
debts  which  represented  the  excess  of  operating  cost  over  operating 
revenues  obtainable  within  the  10  mill  limit,  and  then  to  secure 
popular  approval  of  the  funding  bonds  on  the  ground  that  this  was 
necessary  in  order  to  place  the  charges  outside  the  10  mill  limit. 
Unless  a  municipality  followed  this  course,  there  was  no  way  of 
utilizing  the  surplus  levying  power  up  to  15  mills.  It  was  very  un- 
wise to  compel  resort  to  deficit  financing  in  order  to  secure  permis- 
sion to  use  this  surplus,  instead  of  being  able  to  make  use  of  it 
directly  for  revenue  purposes.  The  present  arrangement  of  the 
Smith  law  limitai:ions  puts  a  decided  compulsion  upon  borrowing 
for  current  expenses.   We  hKw^  reached  the  conclusion  that  it  is 


39 


of  less  significance  thai  tho  Uol  nte  be  rigid^  linuled  tban  it  it 
that  pdUie  debU  bo  Mtrictod 

But  if  greater  emphasis  is  placed  on  the  debt  limits  it  means  that 
less  should  be  given  to  the  tax  limits,  on  the  theory  that  it  matters 
far  less  how  much  a  community  is  spending  provided  it  is  paying  its 
way  as  it  goes,  while,  it  is  of  much  greater  importance  to  make  certain 
that  the  present  g^eration  is  not  accumulating  vast  charges  against 
posterity.  One  of  the  committee's  recommendations  is  a  plan  for  limiting 
the  debt  issues  of  various  districts,  and  in  our  comment  upon  this  plan 
below  we  have  referred  more  fully  to  the  significance  of  the  proposal 
in  connection  with  the  general  subject  of  tax  limits 

III.  The  Acfaninutraftion  of  tho  Genend  Property  Tax. 

The  defeat  of  the  classification  amendment  at  the  recent  election 
means  the  retention  of  the  general  property  tax  as  the  form  of  revenue 
system  through  which  the  great  bulk  of  the  public  revenues  for  local 
purposes  are  to  be  collected.  We  have  already  stated  our  interpretation 
of  the  vote  on  this  amendment,  which  is,  that  the  people  of  Ohio  prefer, 
while  a  property  tax  is  used,  to  have  all  property  taxed  at  a  uniform 
rate.  We  have  given  considerable  attention  to  the  administrative  ques- 
tions involved  and  have  obtained  an  expression  of  views  from  many 
persons  whose  suggestions  might  be  of  value  to  the  committee.  Our 
proposals  for  additional  legislation  which  would  be  required  to  secure 
the  attainment  of  this  end  are  given  below.  Here  it  is  our  purpose  to 
outline  the  administrative  machinery  of  the  property  tax  that  we  may 
understand  the  points  at  which  this  machinery  appears  to  require  im- 
provement in  order  to  function  more  effectively 

>a.    The  Assessment  of  Real  Estate. 

When  the  tax  administrative  system  was  overhauled,  in  191  o,  a 
quadrennial  reappraisal  of  real  estate  was  provided  for  in  lieu  of  the 
decennial  revaluation  which  had  been  conducted  since  i860.  The  county 
auditor  was  to  provide  the  necessary  maps  and  plat  books  for  the  local 
boards  of  assessors,  and  was  to  supervise  their  work  (Sections  5571- 
5574).  No  quadrennial  reappraisal  was  ever  made  under  this  law, 
which  was  replaced  before  the  staled  date  of  the  first  reappraisal  by 
the  Wames  Law,  so-called,  which  set  up  a  system  of  highly  centralized 
tax  administration.  Under  this  law  both  real  estate  and  personal  prop- 
erty were  to  be  assessed  annually  by  centrally  appointed  deputy  tax 
commissioners.  After  two  years  the  centralized  tax  administration  pro- 
vided for  in  the  Wames  Law  was  abandoned  and  the  county  auditor 
was  made  county  assessor,  ex  officio,  with  general  authority  over  the 


assessment  of  all  property.    He  was  required  to  reassess  real  estate 
aimiially  when  so  directed  by  the  tax  commission  or  when  in  his  opinion 
such  reassessment  was  advisable  (Section  5548).    A  subsequent  sec- 
tion of  the  same  act  gave  the  tax  commission  power  to  order  a  reassess- 
ment of  either  real  or  personal  property  in  any  district  or  subdivision 
thereof,  when  in  its  opinion  such  property  had  been  unequally  or  im- 
properly assessed  (Section  5624-4).   The  commission's  control  over  re- 
assessments  disappeared  in  the  revision  of  the  tax  law  in  1917,  and  in 
consequ^ce  no  sufficient  opportunity  for  its  practical  exercise  ever 
arose.    Aside  from  this  temporary  interjection  of  central  control  over 
the  original  assessment  and  reassessment  of  real  property,  sections  554S 
and  5549  vested  an  undue  discretionary  authority  with  the  county  audi- 
tors and  the  boards  of  county  commissioners  and  in  consequence  only 
isolated  mstances  of  reassessment  of  rea!  property  have  occurred.  Tlie 
rcsidt  of  these  various  changes  of  policy  has  been  that  no  general  cor- 
rcction  of  real  estate  valuation  has  been  made  since  1910.    It  was  felt 
early  in  the  session  of  last  winter  that  this  administrative  defect  should 
be  corrected  and  this  policy  the  general  assembly  has  already  approved 
Senate  Bill  146  places  a  greater  responsibUity  upon  the  county  auditor 
for  the  annual  determination  of  the  correctness  of  the  assessed  value  of 
real  estate,  while  it  gives  the  tax  commission  more  precise  and  definite 
authority  than  it  has  had  heretofore  in  the  initiation  and  control  of  the 
assessment  and  in  the  conduct  of  reassessments.    The  tax  commission 
may  now  order  initial  assessments  or  reassessments  of  real  estate  in 
any  taxing  district,  or  in  an  entire  county  where  this  procedure  is  found 
necessary,  or  when  it  is  petitioned  for  by  25  local  taxpayers,  a  board 
of  township  trustees,  or  a .  village  or  city  council.    The  auditor  is 
specifically  required  to  make  such  correction  in  each  year  as  will  main- 
tain a  full  value  assessment  of  real  estate. 

This  hasty  review  of  the  recent  changes  in  the  methods  of  assessing 
real  estate  reveals  a  fluctuation  between  the  principles  of  centralization 
and  decentralization  in  tax  administration.  The  present  plan  may  be 
said  to  represoit  a  fairly  reasonable  compromise.  The  county  auditor 
is  a  locally  chosen  official  but  he  is  now  subject  to  the  supervision  and 
omtrol  of  the  state  tax  commission.  A  check  upon  laxness  or  disin- 
clination is  thus  assured  while  the  beneficial  elements  of  home  rtile  are 
preserved.  With  the  provision  so  recently  enacted  we  feel  that  the 
administrative  machinery  for  a  proper  listing  of  real  property  is  fairiy 
con-plete  and  in  good  working  order,  and  that  in  so  far  as  the  appli- 
cation of  the  uniform  rule  to  real  property  is  concerned,  we  have  already 
provided  ample  administrative  facilities  for  a  proper  enforcement  of 
this  principle.  The  tax  commission  will  doubtless  require  more  adequate 


41 


financial  support  if  it  is  properly  to  discharge  all  of  the  duties  which 
are  being  placed  upon  it,  and  we  recommend  that  larger  appropriations 
for  the  employment  of  expert  and  clerical  assistants  be  made. 

b.    The  Assessment  of  Personal  Property, 

The  changes  of  policy  which  have  been  made  with  respect  to  real 
estate  have  for  the  most  part  applied  to  the  assessment  of  personal  prop- 
erty also.  The  Wames  Law  deputy  tax  commissioners  were  placed  in 
charge  of  personal  property  assessments,  but  under  the  Parrett-VVhitte- 
more  Law  of  1915  the  assessment  of  personal  property  was  returned 
to  the  jurisdiction  of  the  locally  elected  assessors.  This  act  was  nulli- 
fied by  the  courts  after  one  assessment  had  been  made,  and  in  1917  the 
present  system  of  a  voluntary  return  was  introduced.  The  taxpayers 
are  now  provided  with  the  proper  blanks  by  the  county  auditor  and  are 
required  to  make  an  independent  tax  return,  under  oath,  uninfluenced 
in  any  way  by  the  assessor,  whose  principal  functions  now  appear  to 
be  that  of  administering  the  oath  to  taxpayers,  of  giving  assistance  in 
making  the  return  when  this  service  is  requested,  and  of  correcting 
the  returns  under  the  direction  of  the  county  auditor. 

The  essential  feature  of  the  present  system  of  listing  personal 
property  is  the  utter  absence  of  inquisitorial  participation  by  the  local 
assessor.  The  personal  property  returns  are  subject  to  further  examina- 
tion by  the  county  auditor,  who  now  possess  the  authority  to  supervise 
the  assessors,  to  issue  instructions  to  them  from  time  to  time.  (Section 
5367)  ;  to  direct  them  to  correct  the  returns  (Section  5368) ;  to  re- 
quire the  appearance  of  any  persons  who  may  have  knowledge  of  prop- 
erty not  returned  by  any  taxpayer;  and  to  compel  the  production  of 
books  and  papers  in  evidence  (Sections  5398-5403). 

Any  person  who  refuses  to  appear  and  give  testimony  when  sum- 
moned by  the  auditor  is  subject  to  like  proceedings  from  contempt  as 
witnesses  in  actions  pending  in  the  probate  court  (section  5403).  On 
the  basis  of  his  findings  in  any  such  investigation  Section  5401  specifica'ly 
provides  that  the  auditor  shall  proceed  "at  any  time  before  the  final 
settlement  with  the  county  treasurer  to  correct  the  return  of  the  assessor 
and  charge  such  persons  on  the  duplicate  with  the  proper  amount  of 
taxes."  An  examination  of  these  sections  would  indicate  that  the  county 
auditor  already  possesses  ample  authority  to  enforce  the  laws  relating 
to  the  listing  and  assessment  of  property  for  taxation. 

The  General  Code  a^so  contains  an  imposing  list  of  powers  which 
may  be  exercised  by  the  state  tax  commission  in  the  supervision  of  the 
assessment  of  property.  (See  Sections  1465-12  to  1465-27).  Some  of 
the  more  important  of  these  are  the  auUiority  to  appoint  agents  who  shall 


42 

have  the  ri^t  to  inspect  books,  papers  and  other  records  of  any  company, 
firm,  corporation,  person,  association  or  co-partnership  subject  to  the 

laws  which  it  is  required  to  administer ;  to  compel  the  production  of  these 
books,  papers  and  other  records;  to  appoint  agents  who  shall  have  all  of 
the  powers  of  the  commission  in  any  investigation ;  to  obtain  information 
at  the  source  fn»n  all  persons  or  business  concerns  subject  to  laws  which 
the  commission  is  required  to  administer ;  to  institute  contempt  proceed- 
ings in  the  probate  courts ;  and  to  take  the  depositions  of  witnesses  raid- 
ing outside  the  state.  In  such  investigations  no  witness  shall  be  excused 
from  giving  evidence  or  testimony  on  the  ground  of  self-incrimination ; 
akhoi:^  he  shall  not  be  prosecuted  for  any  penalty  or  forfeiture  so  dis- 
closed except  for  perjury  in  so  testifying.  Effective  operation  of  these 
provisions  are  also  contingent  upon  more  ample  appropriations. 

Necessity  may  be  deemed  to  exist  for  legislation  to  connect  more 
intimately  the  powers  of  the  tax  commission  and  of  the  county  auditors 
m  the  assessment  of  property.  We  have  no  specific  suggestions  to  make 
on  the  subject  at  this  time,  but  we  have  the  matter  under  advisement  and 

may  present  recommendations  at  a  later  date. 

IV.    The  Limitation  of  the  Debt- Incurring  Powers  of  the  Local 

Subdivisioiis. 

The  need  for  more  effective  control  over  the  debt-incurring  power 
of  the  local  units  is  best  shown  by  an  outline  of  the  changes  which 
have  occurrred  in  the  statutes  relating  to  that  subject.  In  the  earlier 
acts  which  authorized  the  use  of  public  credit  by  municipalities  and 
townships  no  limits  were  set  to  the  volume  of  debt  that  might  be 
incurred  for  the  specific  purposes  for  which  local  units  were  authorized 
to  borrow,  nor  was  it  considered  necessary  to  set  a  curb  upon  the  dis- 
cretion of  municipal  councils  and  township  trustees  by  requiring  a  vote 
of  approval.  (For  example,  see  76  O.  L.  158,  1873.)  The  list  of  purposes 
for  which  bonds  might  be  issued  was  broadened  in  1893  (90  O.  L. 
229),  and  the  idea  of  a  restriction  on  the  local  borrowing  power  was 
distinctly  repudiated  in  the  following  language,  which  occurs  in  secticm 
 of  the  act: 

Nothing^  herein  contained  shall  be  construed  as  limiting  or  restricting  any 
power  to  sell  bonds  for  any  of  the  purposes  named  in  this  section  otherwise  con- 
ferred by  law ;  but  no  bonds  issued  for  any  of  the  above  named  purposes  and  in 
accordance  with  the  provisions  of  this  section  shall  bear  a  higher  rate  of  interest 
than  six  percentum,  payable  semi-annually,  or  be  sold  for  le^s  than  par". 


43 


The  policy  of  simple  restriction  on  interest  rate  and  sale  price 
was  not  developed  further  in  the  direction  of  effective  limitatioa  on 

the  quantity  of  debt  issued  and  outstanding  until  1902,  when  the  so- 
called  Longworth  act  was  passed  (95  O.  L.  318).  This  act  authorized 
the  issue  of  bonds  by  municipal  corporations  and  townships  for  a  list 
of  specified  purposes,  and  set  up  two  further  limits  to  the  exercise  of 
this  authority: 

1.  The  amount  of  debt  which  might  be  issued  in  any  one  year 

without  a  vote  of  the  people  was  limited  to  1%  of  the  total  assessed 
valuation  of  property  for  taxation. 

2.  The  total  amotmt  of  debt  so  issued  which  might  be  outstanding 
and  unpaid  at  any  time,  was  limited  to  49{^  of  the  total  assessed  valua- 
tion of  property.    There  was  apparently  no  intention  at  this  time  to 

limit  the  amount  of  debt  which  might  be  created  with  the  approval  of 
the  people.  The  percentages  which  were  introduced  as  limits  applied, 
in  the  original  Longworth  act,  to  the  aggregate  of  bonds  outstanding 
and  unpaid.  In  1906  a  change  was  made  which  was  proper  enough  in 
part,  in  that  it  based  the  limitation  of  debt  upon  the  net  indebtedness, 
which  was  defined  as  the  difference  between  the  par  value  of  all  out-^ 
standing  bonds  and  the  amounts  held  in  sinking  funds  for  their  re- 
demption. An  outside  limit  of  8%  was  also  introduced  for  all  debt, 
whether  issued  with  or  without  vote.  (98  O.  L.  65).  This  act  was  made 
the  occasion,  however,  for  an  extension  of  the  debt  limits  by  the  peculiar 
modifications  which  were  introduced  into  the  definition  of  "net  indeDt- 
edness".  It  was  provided  that  certain  classes  of  bonds  should  be  ex- 
cluded from  consideration  in  computing  the  volume  of  net  indebtedness 
to  which  the  percentages  of  i%,  4%  and  8%  respectively  should  apply. 
The  excluded  classes  were : 

1.  Bonds  issued  with  the  approval  of  the  electors. 

2.  Bonds  issued  in  anticipation  of  special  assessments  for  the 
improvement  of  property. 

3.  Bonds  issued  for  the  purposes  of  constructing,  improving  and 
extending  water  works. 

4.  All  bonds  issued  prior  to  April  29,  1902  (The  date  of  the  orig- 
inar Longworth  Act). 

The  effect  of  such  a  definition  was  obviously  to  increase  suddenly 
the  debt-incurring  power  of  many  localities.  That  these  restrictions 
which  the  Longworth  act  had  introduced  did  not  operate  to  check  the 
increase  of  local  debts  is  clear  from  the  following  figures  showing  the 
total  loeal  debt  during  the  period  1900  to  1910: 


44 

Total  heal  debts 

^   m,m,m 

^^^^  •  •   125,396*603 

^^^'^   138,856.813 

^^^^    146.849,926 

^^^^   157,023,489 

  170,179,657 

^^^^  •  '   184,314,231 

^^^^    187,574,322 

^^^^    199,260,470 

Meantime  the  stage  was  being  set  for  a  further  extension  of  the 
debt  limit,  and  this  time  in  a  very  undesirable  direction.  The  borrowing 
power  of  municipal  corporations  was  extended  in  1903  (96  O.  L.,  51) 
by  an  act  which  authorized  the  use  of  deficiency  bonds  in  the  follow- 
ii^  terms: 

"Section  3931.  G)uncil  may  issue  deficiency  bonds  in  such  amounts  and  de- 
nominations, for  such  periods  of  time,  not  to  exceed  fifty  years,  and  at  such  rate 
of  interest  not  to  exceed  six  per  cent  as  it  deems  best  when  in  the  opinion  of 
council  it  is  necessary  to  supply  a  deficiency  in  the  revenues  of  the  corporation. 
The  total  amount  of  deficiency  bonds  issued  by  a  corporation,  outstanding  at  any 
time,  shall  not  exceed  1%  of  the  total  value  of  all  property  in  the  corporatioii  as 
hsted  and  assessed  for  taxation.  The  issuance  of  such  bonds  shall  be  approved  % 
the  vo'es  of  two-thirds  of  all  the  members  elected  to  council,  and  approved  by  the 
votes  of  two-thirds  of  all  the  electors  of  the  corporation  voting  on  such  question 
at  a  regular  or  special  election  to  be  provided  for  by  council". 

The  authority  to  refund  bonds  which  the  municipality  found  itself 
.unable  to  redeem  at  maturity  had  been  granted  much  earlier  (See  R.  S. 
Section  2701.  70  O.  L.  5;  89  O.  L.  417;  92  O.  L.  170).  Apparently 
these  two  classes  of  bonds  had  begun  to  be  inconveniently  large,  for  we 
shall  presently  find  that  measures  were  taken  to  relieve  localities  of  the 
embarassment  which  they  were  causing. 

The  next  legislation  relating  to  debt  limitations  was  enacted  in  191 1, 
in  connection  with  the  general  readjustment  of  valuations  and  tax  rates 
which  became  effective  in  that  year.  The  first:  atti  (102  O.  L.  11)  pre- 
served the  1%  and  the  4%  limits  on  debt  incurT€xi  without  popular  ap- 
proval for  certain  purposes,  and  the  outside  Ihpaitation  of  8%  on  the 
net  debt  which  could  be  incurred  by  a  municipality  for  any  and  all  pur- 
poses, whether  with  or  without  vote.  Net  indebtedness  was  defined  as 
in  the  earlier  acts.  The  increases  in  assessed  valuation  had  been  made 
at  the  time  this  act  was  passed  but  the  full  results  were  probably  not 
available.  Whether  from  lack  of  accurate  knowledge  of  the  increases 
made  or  frwn  design,  the  readjustments  in  the  percentage  limits  had 


45 


the  practical  effect  of  a  further  extension  of  local  borrowing  power. 
Section  2  of  the  act  just  mentioned  provided  that  the  4%  and  8%  limits 
should  apply  to  the  valuations  of  1910  until  September  30,  191 1,  and 
that  on  and  after  October  i,  191 1,  these  limits  were  to  be  reduced  to 
2y^%  and  5%,  respectively,  of  the  valuations  of  property  that  might 
thereafter  be  established.  There  are  no  records  extant  to  indicate  the 
general  assembly's  intention  with  regard  to  the  maintenance  of  the  same 
relative  restraint  on  local  debts  that  had  theretofore  existed,  but  it  is 
certain  that  the  changes  made  resulted  in  an  extension  of  such  local 
debt-incurring  capacity. 

We  are  not  in  such  doubt  with  respect  to  the  second  debt  limita- 
tion enactment  of  191 1  (102  O.  L.  262).  This  rather  extended  act 
was  a  brief  codification  of  the  debt  limit  laws  —  it  brought  together  all 
of  ihe  provisions  relating  to  the  creation  of  local  debt  which  have  been 
outlined  above,  including  the  changes  which  had  been  introduced  earlier 
in  the  same  session.  The  deliberate  extension  of  the  limits  came  in  the 
new  list  of  classes  of  bonds  which  were  to  be  excluded  from  the  defini- 
tion of  net  indebtedness  in  computing  the  debt  limits.  The  changes 
may  be  shown  by  restating  the  list  of  excluded  bonds,  which  is  as 
follows  (Section  3949,  G.  C.) : 

"a.   Bonds  issued  prior  to  April  29,  1902. 

"b.  Bonds  issued  to  refund,  extend  the  time  of  payment  of,  or  in  exchange 
for,  bonds  representing  an  indebtedness  created  or  incurred  prior  to  April  29,  1902. 

"c.  Bonds  issued  in  anticipation  of  the  collection  of  special  assesiments, 
either  in  original  or  refunded  form. 

"d.  Bonds  issued  for  the  payment  of  obligations  arising  through  emergencies 
caused  by  epidemics,  floods  or  other  forces  of  nature. 

"e.  Bonds  issued  to  meet  deficiencies  in  the  revenues,  as  provided  for  in  sec- 
tion 3981  of  the  General  Code. 

**f.  Bonds  issued  for  the  purpose  of  purchasing,  constructing,  improving  and 
extending  waterworks  when  the  income  from  such  waterworks  is  sufficient  to  cover 
the  cost  of  all  operating  expenses,  interest  diarges  and  to  pass  a  sufficient  amount 
to  sinking  fund  to  retire  such  bonds  when  tfa^r  become  due". 

The  exclusion  of  flood  and  other  emergency  bonds  was  proper 
enough,  and  was  very  useful  in  repairing  the  damage  done  by  the 
disastrous  floods  of  1913.  But  it  was  highly  improper  that  refunding 
and  deficiency  bonds  should  have  been  so  treated.  The  appearance  of 
such  bonds  is  at  all  times  a  sign  of  inadequate  tax  revenues  or  of 
woefully  incompetent  financial  administration,  and  it  is  not  without 
significance,  as  we  look  back  upon  other  events  of  the  year  191 1,  that 
the  way  should  have  been  made  easier  for  municipal  deficit  financiering 
through  these  changes  in  the  debt  limit  law  in  the  same  session  of  the 


46 


legislature  in  which  was  being  provided  a  greater  incentive  for  resort 
to  such  methods  in  the  peculiar  arrangements  of  the  tax  limit  law. 
We  have  already  pointed  out  that  this  law  has  not  served  effectively 
to  check  the  increase  of  local  indebtedness,  but  has  rather  appeared  to 
have  the  contrary  effect  of  encouraging  it. 

The  next  step  in  the  control  of  the  local  bond  issuing  practices  was 
the  adoption  of  Article  XII,  Section  ii  of  the  state  constitution,  in 
1912.   This  section  reads  as  follows: 

"No  bonded  indebtedness  of  the  state,  or  of  any  political  subdivision  thereof, 
shall  be  incurred  or  renewed,  unless,  by  the  legislation  under  which  such  indebted- 
ness is  incurred  or  renewed,  provision  is  made  for  levying  and  collecting  annually, 
by  taxation,  an  amount  sufficient  to  pay  the  interest  on  said  bonds,  and  to  provide 
a  sinking  fund  for  their  final  redemption  at  maturity". 

This  amendment  proved  particularly  embarassing  for  the  time  be- 
cause of  the  restrictions  upon  the  local  tax  levies  which  the  tax  limit 
law  had  imposed.  These  limits,  it  will  be  remembered,  permitted  the 
interest  and  sinking  fund  levies  for  debts  incurred  before  June  2,  191 1, 
and  for  all  debts  issued  thereafter  by  vote  of  the  people,  to  be  made 
outside  the  ten  mill  limit,  but  required  them  to  be  included  within  the 
fifteen  mill  limit.  All  bonds  issued  without  popular  vote  were  to  be 
provided  for  within  the  ten  mill  limit.  On  the  face  of  things  we 
have  here  an  effective  limitation  upon  the  volume  of  local  indebtedness 
which  might  be  incurred,  because  of  the  close  restrictions  upon  the  tax 
levies  for  the  purpose  of  paying  the  mterest  and  sinking  fund  charges 
against  such  debts.  And  in  view  of  the  constitutional  requirement  that 
tax  levies  for  such  purposes  must  be  made,  nothing  more  would  seem 
necessary  in  order  to  hold  down  local  debts. 

As  a  matter  of  fact,  however,  this  has  not  happened,  as  the  figures 
given  above  show.  On  the  contrary,  it  may  with  reasonable  accuracy 
be  said  that  the  principal  effect  of  the  restrictions  on  the  levying 
power  of  localities  has  been  to  diminish  their  debt-paying  power,  and 
so  to  influence  unfavorably  the  standing  of  Ohio  municipal  and  other 
local  bonds  in  the  general  financial  market.  Theoretically  the  full  faith 
and  credit  of  an  Ohio  municipality  is  plecjged  for  the  payment  of 
interest  and  principal,  but  practically,  this  is  not  the  case  becau.se  of 
the  restrictions  on  the  levying  power  for  such  purposes.  Such  bonds 
must  be  sold  on  less  advantageous  terms  and  this  means  an  additional 
burden  on  Ohio  taxpayers. 

The  constitutional  amendment  of  T912  would  have  been  much 
more  embarassing  for  many  localities  if  it  had  not  been  for  certain 
earlier  statutory  enactments  which  have  permitted  the  withdrawal  of 


47 


money  or  securities  held  in  the  sinking  fund  for  other  purposes  than 
bond  retirement.  Section  4506  authorizes  the  payment  from  the  sinking 
fund  of  all  judgments  found  against  the  corporation  except  in  condem- 
nation of  property  cases,  (96  O.  L.  54),  and  Section  4517  authorizes 
the  trustees  of  the  sinking  fund  to  sell  or  use  any  of  the  money  or 
securities  in  their  possession  for  the  satisfaction  of  any  obligations  under 
their  supervision.  These  raids  upon  the  siiddnfir  funds 
tunately  perfectly  legal,  but  they  have  the  effect  of  defeating  the 
purpose  of  the  constitutional  requirement  for  sinking  fund  levies. 
Such  practices  and  the  laws  which  make  them  possible  cannot  be 
too  ttroogly  condrmnedy  for  in  addition  to  the  evils  of  deficit  fiminring 
wludi  they  encourage  tliey  hmwe  hdped  to  divert  attention  from  fhm 
more  inixirtant  proUems  of  taxation  reform  wliidi  odierwiso  wooUl 
have  been  forced  upon  the  state  long  ago. 

The  final  enactment  in  this  series  of  debt  limit  laws  came  in  1917, 
when  the  amount  of  debt  that  might  be  incurred  in  any  one  year 
without  popular  vote  was  reduced  from  1%  to  J4%  of  the  total  assessed 
valuation  of  property.  This-  change  came  too  late  to  be  of  great  service 
in  debt  restriction,  for  the  localities  had  already  piled  up  an  accumula- 
tion of  debt  which  in  many  instances  has  become  extremely  burdensome. 
The  extent  of  this  burden  is  shown  by  the  following  data,  compiled  by 
the  auditor  of  state  in  191 7.  The  eighty  cities  in  the  state  collected 
in  tax  revenues  for  the  year  1917  an  aggregate  of  $26411,178  for  city 
purposes,  but  it  required  $180,657  in  excess  of  this  large  amount  to  pay 
the  interest  and  retire  the  bonds  falling  due  during  the  year.  The  per- 
cent of  the  tax  income  for  the  year  which  was  required  for  interest  and 
bond  redemption  purposes  is  shown  in  the  following  table,  which  gives 
the  number  of  cities  in  each  percentage  group. 

NUMBER  OF  CITIES  HAVING  INTEREST  AND  RETIREMENT  CHARGES 
BEARING  THE  INDICATED  PERCENTAGES  OF  TAX  INCOME 


FOR  YEAR.* 

Percentage  ^ 

groups  Kumber 

Under  50%   2 

50%  to  100%...   42 

100%  to  150%   28 

Over  150%  !   8 

Total   80 


The  only  explanation  of  this  situation  is  that  the  funds  for  current 
operation  were  obtained  from  new  loans  and  from  the  sinking  fund 


^Auditor  of  State,  Report,  1917,  pp.  6-10. 


through  the  device  of  confessing  judgment  in  suits  for  salaries  and 
other  claims  brought  against  the  cities.  The  conjunction  of  debt  and 
tax  limits  conspired  to  make  this  the  easiest  way  of  securing  the  needed 
revenues. 

The  conclusion  which  we  reach  from  this  record,  when  read  in  con- 
nection with  the  rise  of  local  debts,  is  that  the  general  assembly  must  set 
up  a  debt  limit  which  will  really  operate  effectively  to  control  local  debt 
creation  and  redemption.  The  debt  limits  must  be  strenghtened  and  the 
tax  limits  sufficiently  relaxed  to  permit  the  payment  of  current  expenses 
from  current  income,  while  the  resort  to  public  credit  should  be  restrained 
to  those  proper  and  necessary  uses  which  alone  justify  the  loan  as  against 
the  tax  for  the  support  of  government.  A  careful  revision  of  Sections 
3913  and  3931  should  probably  be  made  in  order  to  limit  more  strictly 
the  local  emergency  borrowing  powers. 

V.  The  Ohio  System  of  Tajdng  CorpomtioBt* 

The  Ohio  S3rstem  of  taxing  corporations  is  necessarily  complicated, 
by  reason  of  the  great  diversity  of  the  classes  of  corporations  which 
must  be  reached  under  any  adequate  system  of  corporate  taxation.  In 
presenting  this  brief  outline  of  the  Ohio  system  we  have  had  no  in- 
tention other  than  to  exhibit  thereby  some  of  the  complications  of  the 
subject  and  to  describe  briefly,  for  the  benefit  of  the  general  assembly 
and  of  other  readers  of  this  report,  a  part  of  the  Ohio  revenue  system 
which  we  have  not  undertaken  to  change.  Our  reason  for  not  entering 
upon  such  an  undertaking  at  this  time  will  perhaps  be  made  clear  as 
our  exposition  proceeds;  and  such  further  explanation  as  may  be  re- 
quired may  more  profitably  be  given  after  the  outlines  of  the  present 
system  are  before  us. 

Our  system  of  corporate  taxation  must  be  presented  from  two 
points  of  view,  in  order  to  be  thoroughly  understood.  The  first  is  the 
form  of  the  tax  imposed  and  the  second  is  the  purpose,  whether  sta^e 
or  local,  for  which  each  tax  is  levied.  In  this  discussion  we  shall  fol- 
low the  order  observed  in  the  General  Code  and  shall  indicate  for  each 
class  of  corporations  first  the  nature  of  the  taxes  imposed  and  then  the 
treasuries  into  which  these  taxes  find  their  way. 

I.  Miscellaneous  Business  Corporations.  All  miscellaneous  busi- 
ness corporations,  domestic  and  foreign,  are  subject,  first  of  all,  to  the 
genera]  property  tax  (Sections  5404-5406).  Their  real  estate  and  such 
tangible  personal  property  as  merchants*  and  manufacturers'  stocks  and 
personal  property  on  farms,  is  assessed  and  taxed  where  located;  and 
their  other  personal  property  is  assessed  and  taxed  in  the  p^ace  which 
they  may  designate  as  their  principal  place  of  business.  The  property 
of  corporations  is  returned  to  the  respective  county  auditors  and  is 


49 


assessed  by  them.  In  recent  y ws  the  auditors,  acting  under  the  gen- 
eral direction  of  tht  state  tax  commission,  have  been  requiring  submis- 
sion of  balance  sheets  and  other  financial  statements  for  the  purpose 
of  checking  the  returns  of  property  made  on  the  assessment  blanks. 
The  rates  applied  are  the  local  rates  of  the  several  taxing  districts  m 
which  the  property  is  listed  and  the  taxes  paid  on  account  of  such  prop- 
erty are  for  local  iises. 

This  general  class  of  corporations  is  also  subject  to  taxation  for 
state  purposes.  Domestic  corporations  are  required  by  Section  5498  to 
pay  a  tax  of  3/20%  or  not  less  than  $10,  on  their  subscribed  or  issued 
and  outstanding  capital  stock,  and  such  shares  are  exempted  from  taxa- 
tion as  property  in  the  hands  of  the  holders  (Sections  192  and  5372). 
Foreign  corporations  pay  a  similar  franchise  tax  of  3/20%,  or  not  less 
than  $10,  on  the  proportion  of  the  authorized  capital  stock  represented 
by  the  property  owned  and  used  and  the  business  transacted  in  the 
state  (Section  5503).  The  shares  of  such  corporations  are  not  exempt 
from  taxation  as  property  in  the  hands  of  the  holders,  if  the  latter  are 
residents  of  the  state,  unless  two-thirds  of  the  property  of  such  cor- 
poration is  located  within  the  state. 

2.  Banks.  The  method  of  taxing  banks  is  in  general  determined 
by  the  rules  which  have  been  laid  down  by  the  federal  laws  for  the  state 
taxation  of  national  banks.  These  institutions  may  be  taxed  by  the 
states  in  which  they  are  located  in  the  same  manner  in  which  other 
moneyed  capital  is  taxed.  In  practice  this  means  that  all  banking  in- 
stitutions recognized  as  such  will  be  taxed  by  a  given  state  in  the  same 
manner,  to  avoid  discrimination.  Bank  real  estate  is  to  be  taxed  where 
located  in  the  same  manner  as  the  real  estate  of  individuals  (Section 
5409).  The  bank  shares  are  to  be  taxed  in  the  place  where  the  bank 
is  iQpated,  to  the  holders  thereof,  unless  the  bank  has  agreed  to  assume 
the  taxes.  The  assessment  of  bank  shares  is  made  by  the  county  auditor, 
on  the  basis  of  the  book  value  (or  the  market  value  if  sucli  is  ascertain- 
able) less  the  assessed  valuation  of  the  real  estate  locally  taxed  (Sec- 
tion 5412).  No  state  tax  is  imposed  on  banking  institutions  as  such, 
except  certain  fees  levied  on  state  banks  for  the  support  of  the  state 
banking  department. 

3.  Public  Utilities.  All  of  the  real  and  personal  property  of  public 
utilities  which  is  used  in  the  business  is  subject  to  taxation  for  local  pur- 
poses. A  return  of  this  property  is  made  to  the  state  tax  commission  by 
whom  the  assessment  is  made  and  certified  locally  to  the  various  taxing 
districts  in  which  the  property  is  located.  The  distribution  is  on  the 
basis  of  proportionate  valuation  except  in  the  case  of  express,  tel^raph 
and  teiephont  companies.   In  these  cases  die  real  estate  locally  assessed 


so 

is  deducted  from  the  total  valuation  of  the  property  used  in  the  state, 
and  the  remainder  is  apportioned  locally,  in  the  case  of  express  companies 
in  tfic  proportion  of  the  gross  receipts  from  the  different  taxing  districts 
in  which  express  company  property  is  located;  and  in  the  case  of  the 
telegraph  and  telephone  companies,  in  the  proportion  of  the  miles  of  wire 
in  the  different  districts. 

The  various  classes  of  public  utilities  are  also  taxed  for  state  pur- 
.  poses  on  their  gross  receipts  from  business  done  within  the  state.  This 
is  an  excise  tax  levied  by  the  state  for  the  privilege  of  carrying  on  the 
intra-state  business  (Section  5485).  The  rates  vary  with  the  different 
dasses  of  utilities,  and  range  from  1.2%  in  the  case  of  such  companies 
as  electric  light,  gas,  water,  heating  and  cooling  companies,  to  4%  in  the 
case  of  steam  railroad  and  pipe  line  companies.  The  various  classes  of 
car  companies  (sleeping  car,  freight  line  and  equipment  companies)  pay 
an  excise  tax  of  1.2%  on  that  proportion  of  their  capital  stock  which 
represents  the  property  owned  and  used  within  the  state. 

4.  Foreign  Insurance  Companies.  An  excise  tax  is  levied  by  the 
state,  for  state  purposes,  on  the  amount  of  gross  premiums  received  by 
foreign  insurance  companies  from  policies  covering  risks  within  the 
state,  less  return  premiums  and  considerations  received  for  reinsurances. 
The  tax  is  computed  by  the  commissioner  of  insurance  and  the  present 
rate  is  2j^%. 

This  very  hasty  review  of  the  Ohio  system  of  taxing  corporations 
win  suffice,  perhaps,  to  reveal  the  maze  of  complications  which  has  been 
built  up.  In  view  of  such  an  entanglement  of  taxing  provisions  it  is 
impossible  for  anyone  to  decide,  without  far  greater  opportunity  for 
careful  study  than  we  have  had,  whether  such  a  system  is  operating 
properly  or  not.  It  is  perfectly  clear  that  there  are  too  many  interests 
involved  to  undertake  a  reorganization  and  readjustment  of  the  system 
of  corporation  taxes  without  the  most  careful  study  of  the  whole  prob- 
lem. At  one  point  is  the  local  revenue  derived  from  the  corporate 
property  locally  taxed,  and  the  effect  of  a  general  change  in  the  system 
upon  the  local  finances;  at  another  point  is  the  system  of  segregated 
revenue  sources  for  the  state,  and  the  effect  upon  this  policy  of  a  general 
reformation  of  rates  and  type  of  tax  applied ;  at  still  another  point  is 
the  questeion  of  the  relative  tax  burden  which  the  various  groups  and 
classes  of  corporations  ought  to  pay,  as  compared  among  themselves  and 
with  other  classes  of  taxpayers.  The  proper  basis  of  corporate  taxation 
must  also  be  considered ;  and  finally,  there  is  the  far-reaching  question 
of  th^  ultimate  incidence  of  such  taxes.  The  extent  to  which  these  taxes 


51 

are  successfully  shifted  must  be  considered  in  determining  the  weight 
of  the  so-called  corporation  taxes.  These  are  some  of  the  considerations 
which  have  caused  us  to  refrain  from  attacking  the  vast  problem  of  our 

corporation  taxes  at  this  time,  for  we  realized  that  the  date  set  for  the 
opening  of  the  adjourned  session  of  the  general  assembly  would  arrive 
before  a  study  of  such  magnitude  could  be  completed.  These  considera- 
tion will  also  serve  to  make  clear  our  reasons  for  not  extending  the  in- 
come tax  which  we  have  recommended  to  the  incomes  of  corporations. 
A  satisfactory  tax  on  the  income  of  corporations  would  require  careful 
and  extensive  adjustments  of  the  present  system  of  taxing  corporations 
for  local  and  state  purposes.  The  constitution  would  not  at  present 
permit  the  substitution  of  an  income  for  a  property  tax  (See  Article  XII, 
Section  2  and  Article  XIII,  Section  4),,  and  such  an  income  tax  would 
need  to  be  regarded  as  a  minor  and  auxiliary  revenue  measure.  But 
even  such  a  measure,  we  insist,  could  properly  be  undertaken  only  after 
very  thorough  study  of  all  phases  of  the  problem.  We  recognize  that 
the  Ohio  system  of  corporate  taxation  is  confused,  at  points  illogical, 
and  in  some  instances  perhaps  unjust.  We  su|^est  that  the  further 
study  of  this  immense  problem,  with  a  view  to  securing  greater  unity 
in  the  whole  tax  system,  might  very  well  be  given  the  careful  considera- 
tion of  the  general  assembly. 

VL  SamBiMry  of  FindingB  in  Chapt^s  II  and  III. 

The  financial  situation  in  Ohio,  as  the  committee  views  it  after  the 
above  survey,  may  be  summarized  thus:  so  far  as  the  state's  finances 
are  concerned,  there  will  almost  certainly  be  a  deficit  for  the  present 
biennium,  although  the  amount  of  it  will  be  determined  by  the  volume 
of  additional  appropriations  which  may  be  made  and  by  the  yield  of 
the  existing  and  the  new  sources  of  state  revenue.  The  most  serious 
aspects  of  the  state  finances  are  the  inelasticity  and  the  inadequacy  of 
the  tax  revenues,  the  excesses  of  appropriations  over  actual  receipts  and 
the  need  of  a  greater  degree  of  state  participation  in  matters  of  state- 
wide interest  and  responsibility,  such  as  health  supervision  and  educa- 
tion. In  view  of  the  expanding  requirements  of  these  and  other  public 
activities  it  is  our  judgment  that  the  present  state  revenue  system  is 
proving  increasingly  insufficient,  and  that .  serious  consideration  should 
be  given  to  its  readjustment. 

The  data  compiled  by  the  state  tax  commission  shows  that  the  local 
subdivisions  assessed  a  total  tax  revenue  of  $120,000,000  in  1918.  Other 
materials  assembled  by  the  same  body,  indicate  that  the  budget  requests 
f  rmn  these  subdivisions  which  were  denied  by  the  local  budget  commis- 


sioners  totaled  some  $30,000,000  to  $38,000,000.  (See  table  VI  above. 
Allowance  is  here  made  for  the  omitted  districts.)  It  is  impossible  to 
determine  just  how  much  water  these  original  requests  contained,  in 
anticipation  of  the  squeezing  which  it  was  understood  would  be  applied 
by  the  budget  commissioners,  but  it  is  most  unlikely  that  the  entire 
amount  refused  was  unnecessary  excess,  and  it  foUows  that  the  amounts 
received  in  1918  were  insufficient  to  permit  the  proper  conduct  of  the 
local  governmental  activities  in  that  year.  In  the  following  chapter  we 
have  presented  our  estimates  of  the  revenues  which  ,  may  be  expected 
from  the  new  measures  which  are  herewith  recommended,  and  we  pre- 
sent here  a  summary  of  these  estimates  for  the  purpose  of  showing  the 
extent  to  which  our  program  may  be  expected  to  meet  the  existing 
financial  requirements.  We  admit  freely  that  we  are  indulging  in  guess- 
work, but  we  have  takai  care  that  we  shall  understate  rather  than  ex- 
aggerate the  situation.  Our  figures  may  properly  be  criticized,  there- 
fore, from  this  point  of  view. 

The  additional  revenues  which  it  is  clear  must  be  provided  for  the 
state  and  the  local  units  may  be  obtained,  ultimately,  from  different 
sources,  or  by  a  combination  of  sources.  The  possibilities  are  the  fol- 
lowing : 

I..  The  new  taxes  herewith  proposed  by  the  committee ; 

2.  Enlarged  taxes  resulting  from  the  increases  in  the  property 
duplicate ; 

3.  A  similar  increase  in  revenues  resulting  from  advances  in  prop- 
erty tax  rales. 

A  fourth  possibility  exists,  in  the  form  of  other  additional  sources 
of  revenue  not  covered  in  this  report.  We  have  refrained  from  the 
consideration  of  such  additional  sources  of  public  income  until  the  effects 
of  our  present  suggestions  may  be  more  accurately  appraised.  The  esti- 
mated yield  of  the  new  taxes  proposed  and  the  estimated  distribution 
to  the  state  and  the  various  subdivisions  are  as  follows : 


S3 


ESTIMATED  TOTAL  YIELD  OF  THE  NEW  TAXES  AND  ESTIMATED 
DISTRIBUTION  TO  THE  STATE,  THE  CITIES  AND  THE  OTHER 

LOCAL  SUBDIVISIONS. 


• 

Tax. 

Total  Yield. 

Estimated 
Share  to 
Cities. 

Estimated 
Share  to 
Other  Local 
Subdivisions 

Estimated 
Share  to 
State. 

Tax  on  Motor  Vehicles 

• 

Totals  

Total  Minimum  Re- 
quirements in  ldl8. 

$7,000,000 

3,000,000 
8,000,000 

$2,500,000 
1,250,000 
5,000,000 

$1,000,000 
250,000 
1,000,000 

$3,600,000 
1,500,000 
2,000,000 

$18,000,000 

$8,750,000 

$11,774,005 

$2,250,000 

$3,473,641 

17,000,000 

Estimated  Shorta^re 

$3,024,005 

$1,223,641 

Note:  —  The  estimated  share  for  the  state  includes  the  yield  of  the  inherit- 
ance tax,  which  has  already  been  included  in  Table  II  above.  The  yield  of  the 
vehicle  tax  will  not  enter  the  state  general  revenue  fund  at  all,  hence  the  only 
item  available  for  the  estimated  state  deficit  will  be  the  yield  of  the  income  tax. 

The  estimates  of  the  local  requirements  were  arrived  at  by  assuming  that 
the  12%  increase  for  the  18  missing  counties  would  be  spread  evenly  among  the 
various  classes  of  subdivisions.  The  minimum  requirements  shown  in  Table  VI 
above  were  increased  12%,  and  this  total  was  then  reduced  1/6  on  the  assumption" 
that  the  preliminary  budget  requ&sts  had  been  inflated  by  that  amount  in  anticipa- 
tion of  cuts. 

The  school  needs  as  shown  in  Table  VI  above  are  omitted  here  because  it 
is  expected  that  tiiese  will  be  met  by  our  school  relief  bill 

It  must  be  borne  in  mind  that  our  calculations  have  proceeded  upon 
the  basis  of  the  1918  local  requirements,  and  that  by  1920  these  total 

requirements  would  have  advanced  materially.  It  appears  from  these 
estimates  that  the  amount  of  additional  revenues  v^hich  will  become 
available  for  the  local  units  in  1920  through  the  new  revenue  measures 
here  outlined,  if  all  are  adopted,  will  not  prove  sufficient  to  cover  the 
local  needs  on  the  basis  of  last  year's  requirements ;  but  in  order  for  even 
the  degree  of  relief  which  we  have  suggested  to  be  realized,  it  will  be 
necessary  to  enaet  the  income  tax  in  time  to  apply  to  incomes  arising  in 
1919,  that  is,  before  the  close  of  the  calendar  year  1919. 

We  are  accordingly  recommending  this  bill  for  passage,  but  in  pre- 
senting it  we  feel  that  our  position  with  regard  to  such  a  tax  should  be 
frankly  stated.  We  have  been  very  favorably  impressed  by  the  plan  of 
property  and  income  taxation  proposed  by  the  National  Tax.  Assodation 
in  its  Model  System  of  State  and  Local  Taxation.  A  correlation  of 
property  and  income  taxation  of  the  sort  there  proposed  is  not  now  pos- 


54 


sible  in  Ohio  for  constitutional  reasons  and  we  have  been  obliged  there- 
fore to  view  the  income  tax  as  a  minor  and  auxilliary  revenue  resource. 
Some  members  of  the  committee  are  reluctant  to  enact  the  income  tax 
in  addition  to  the  present  system  of  property  taxation,  and  we  are  sub- 
mitting this,  bill  only  because  we  see  no  satisfactory  alternative  method 
of  prwiding  larger  revenues  to  meet  the  immediate  needs  of  the  state 
and  the  local  subdivisions,  particularly  the  municipalities.  These  needs 
are  urgent  and  immediate;  they  represent  the  amounts  which  ought  if 
possible  to  be  provided  for  the  fiscal  year  1920,  and  it  must  be  under- 
stood that  our  estimated  shortages  as  stated  above  are  undoubtedly  far 
below  the  actual  figures  for  1920,  because  of  the  rate  at  which  public 
outlays  are  expanding.  Our  entire  program  will  not  assure  iromplete 
relief,  as  we  have  shown;  but  even  this  degree  of  relief  will  not  be 
available  unless  the  income  tax,  and  we  may  add,  the  motor  vehicle 
tax,  are  enacted,  for  the  following  reasons: 

1.  The  increases  in  the  property  duplicate  which  we  may  reason- 
ably esqiect  to  follow  from  more  eflEective  administration  will  produce 
no  tStd  upon  local  revenues  until  the  tax  collections  of  1921. 

2.  The  emergency  relief  bill  for  cities  (H.  B.  567)  provided  ad- 
ditional support  for  the  fiscal  year  1919  only. 

3.  Any  increase  which  may  occur  in  the  property  duplicate  will 
produce  no  effect  upon  the  state's  revenue  for  general  purposes,  even  in 

4.  It  would  avail  nothing  at  this  date  for  the  year  1920  to  modify 
the  existing  tax  rate  limitations,  since  these  changes  would  not  become 
effective  in  producing  enhanced  revenues  until  192 1. 

5.  Finally,  the  amount  of  yield  which  may  be  expected  from  the 
increases  in  the  property  duplicate,  when  efifective,  and  from  the  in- 
heritance tax,  are  quite  uncertain.  The  yield  of  the  income  and  motor 
vehicle  taxes  is  also  uncertain,  but  we  see  no  escape  from  the  conclusion 
^t  their  support,  whatever  it  may  be,  will  be  needed  in  order  to  permit 
tfic  state  and  the  localities,  especially  the  cities,  to  function. 

These  considerations  do  not  reduce  the  income  tax  and  the  motor 
vehicle  tax  to  the  status  simply  of  emergency  measures.  Our  estimates 
of  local  needs  are  based  on  the  19 18  figures,  and  we  have  not  undertaken 
to  calculate  the  rate  at  which  these  needs  are  at  present  expanding.  The 
inevitable  growth  of  our  cities  will  not  only  absorb  the  yield  of  the  new 
taxes  here  proposed,  but  will  doubtless  compel  ultimate  resort  to  the  final 
great  resource  of  the  state,  the  aggregate  property  duplicate.  If  larger 
revenues  can  be  secured  by  listing  a  larger  total  of  property  for  taxa- 
tion, it  will  naturally  result  in  a  more  equitable  distribution  of  the  tax 
burden;  but  if  the  efforts  which  we  suggest  making  to  this  end  fail  of 


55 


the  expected  results,  we  see  no  alternative  but  the  imposition  of  heavier 
rates  than  are  now  permitted  by  law,  if  education,  health  and  sanitation, 
the  protection  to  life  and  proDertv.  and  all  of  the  other  beneficial  activi- 
ties of  goverment  are  not  to  languish.  We  urge  this  the  more  strongly 
because  we  are  as  reluctant  to  countenance  further  resort  to  an  unwise 
use  of  public  credit  as  we  are  desirous  that  the  present  program  of  local 
debt  extinction  be  maintained  and  even  extended.  Unflinching  taxation 
for  a  few  years  will  result  in  the  retirement  of  a  sufficient  volume  of 
local  debt  to  free  very  substantial  local  revenues  for  current  use  without 
a  further  advance  in  tax  rates.  We  urge  that  such  a  policy  of  local 
finances  be  made  possible. 


CHAPTER  IV. 
Simmuury  ol  the  CommilWs  ReconoMBdiitioiis. 

The  committee's  program  falls  into  two  parts,  as  indicated  above. 
The  first  consists  of  the  temporary  relief  measures  which  were  enacted 
dunng  the  first  i»rt  of  the  present  session.  The  other  includes  the  pro- 
posals of  a  more  permanent  character,  such  as  the  revised  inheritance 
tax,  the  income  tax  and  the  extended  control  of  the  state  tax  commission 
and  the  county  auditor  over  the  assessment  of  real  property.  We  shall 
present  our  recommendations  in  logical  order,  with  explanatory  comments 
upon  each  feature.  Naturally  less  attention  will  be  given  to  those  por- 
tions which  have  already  received  the  sanction  of  the  general  assembly. 

I.  Tlie  Temporary  Relief  Measures. 

The  laws  under  which  emergency  relief  was  extended  to  local  sub- 
divisions were  passed  as  H.  B.  567  and  S.  B.  187.  The  former  authorized 
the  taxing  authorities  of  counties,  municipal  corporations,  townships  and 
school  districts  to  fund  deficiencies  for  the  year  1919,  issue  bonds  and 
levy  taxes  for  the  necessary  interest  and  sinking  fund  charges.  The  latter 
measure  was  enacted  as  an  aHemative,  open  to  boards  of  education  only. 
These  boards  were  authorized,  at  their  discretion  either  to  seek  relief 
under  H.  B.  567,  by  funding  their  deficits,  or  to  proceed  at  a  special 
election  to  secure  approval  of  the  voters  for  a  special  levy  for  school 
purposes  for  the  year  1920,  the  rate  not  to  exceed  2  mills.  The  mem- 
bers of  the  general  assemb^  are  already  familiar  with  these  measures 
and  further  descriptive  comment  is.  unnecessary. 

II.  Tlie  Legislative  Proposals  ol  a  More  Permanent  diaracUr. 

a.   For  the  more  effectwe  enforcement  of  the  property  tax. 

We  have  already  described  the  changes  which  the  committee  worked 
out  respecting  the  administration  of  real  estate  assessments.  In  that 
connection  we  expressed  the  judgment  that  these  changes  were  adequate 
and  sufficient  to  insure  a  proper  valuation  and  assessment  of  real  property. 
We  have  not,  therefore,  deemed  it  necessary  to  recommend  further  legis- 
lation in  so  far  as  this  phase  of  the  matter  is  concerned. 

With  regard  to  the  proper  assessment  of  personal  property,  we  have 
also  shown  above  that  very  extensive  powers  have  akeady  been  given  to 

56 


57 


the  county  auditors  and  state  tax  commission.  If  a  broader  exercise  of 
these  powers  were  made  possible  by  more  ample  appropriations,  it  would 
go  far,  in  our  judgment,  to  realize  that  degree  of  supervisory  authority 
which  is  consistent  with  a  safe  treatment  of  tiie  credit  structure  of  the 
state. 

b.    The  Inheritance  Tax. 

The  committee's  inheritance  tax  measure  was  enacted  in  the  earlier 
session  of  the  general  assembly  and  the  text  of  tiie  law  is  not  reprinted 
in  this  report.  Inasmuch  as  there  has  been  no  suitaWe  opportunity 
hitherto  for  die  discussion  of  this  bill,  we  include  herewith  an  account 
of  its  more  salient  features. 

The  position  of  the  inheritance  tax  in  the  modern  taxation  system 
IS  too  well  established  today  to  require  argument  in  its  defense.  Ohio's 
inheritance  tax  law  has  long  been  out  of  line  with  the  best  l^slation  on 
this  subject,  since  it  has  applied  to  collateral  heirs  only,  its  administra- 
tive  provisions  have  been  defective,  and  its  yield,  therefore,  negligible. 
A  progressive  direct  inheritance  tax  law  would  have  been  of  doubtful 
constitutional  validity  after  the  case  of  State  vs.  Ferris  (53  O.  S.  314, 
1895),  until  this  drubt  was  removed  by  the  adoption  of  Article  Xllj 
Section  8,  in  which  the  rule  of  progression  was  expressly  sanctioned. 

The  immediate  occasion  which  compelled  resort  to  the  direct  in- 
heritance tax  was  the  prospect  of  losing  the  liquor  revenues,  a  prospect 
which  became  a  certainty  as  the  national  prohibition  amendment  was 
ratified  The  joint  special  taxation  committee  proceeded  to  study  with 
-reat  care  the  inheritance  tax  laws  of  the  various  states  and  in  tiie  pre- 
paration  of  the  bill  which  was  enacted  into  law  we  sought  to  draft 
such  a  law  as  would  reflect  accurately  Ohio's  general  position  on  the 
subject  of  inheritance  taxation.  We  found  that  there  were  wide  varia- 
tions in  rates,  estate  groups  and  exemptions.  We  avoided  the  extreme 
radicalism  of  one  section  and  the  extreme  conservatism  of  another  and 
sought  to  work  out  a  safe  middle  ground  that  would  somewhat  <irre- 
spond  with  our  strategic  position  between  the  west  and  the  east. 

In  accord  with  universal  modem  usage  we  have  made  the  rates  on 
an  classes  of  heirs  progressive,  beyond  reasonable  exemptions  to  direct 
heirs,  every  inherited  estate  is  an  indication  of  suddenly  enhanced  ability 
to  pay,  and  there  is  every  reason  for  attempting  to  guage  this  increased 
ability  to  pay  by  a  system  of  graduated  rates.  On  the  other  hand  it  was 
our  aim  to  keep  the  rate  of  progression  fairly  moderate  in  order  to 
avoid  undue  discouragement  to  capital  accumulation.  In  establishing 
tiie  stages  of  tiie  progression  we  have  kept  in  mind  the  needs  of  the  state 
as  well  as  the  two  considerations  just  mentioned.   We  have  confidence 


58 


that  our  rate  schedules  wiH  receive  general  approval  as  a  satisfactory 
achievement  of  our  three-fold  purpose.  In  this  connection  the  fact  should 
be  emphasized- that  only  a  small  portion  of  the  community's  accumulated 
wealth  becomes  subject  to  an  inheritance  tax  in  any  given  year;  and 
m  order  to  avoid  undue  discrimination  it  becomes  highly  desirable  that 
such  rates  as  are  established  should  remain  fairiy  stable  for  a  consld- 
erable  period  of  years. 

The  particular  grouping  of  the  beneficiaries  which  we  have  estab- 
lished IS  calculated  to  approximate  with  some  fairness  the  variations 
m  dependency  upon  the  decedent,  and  so  to  assure  a  fairer  recognition 
of  ability  to  pay.  Three  classes  are  set  up,  distinguished  bv  the  degree  of 
such  dependency,  and  receiving  different  exemptions.  The  usual  class 
of  direct  heirs  is  divided,  the  wife  or  a  minor  child  being  allowed 
feooo,  and  all  other  so-called  direct  heirs  receiving  $3,500  exemption. 
Cc^teral  heirs  are  allowed  $500  exemption,  and  unrelated  persons  and 
mstitutions  are  allowed  no  exemption.  Three  schedules  of  rates  are 
provided,  applying  respectively  to  all  direct  heirs,  to  collateral  heirs,  and 
to  all  other  beneficiaries. 

In  determining  the  conditions  under  which  property  passing  by 
succession  shall  be  subject  to  the  inheritance  tax  we  have  had  in  mind 
the  desirability  of  jwomoting  interstate  comity  and  uniformity.  The 
amditions  which  we  have  laid  down  correspond  closely  to  the  provisions 
of  tiie  model  inheritance  tax  law  which  has  been  recommended  by  the 
National  Tax  Association.  We  have  further  sought  to  promote  inter- 
state  comity  and  uniformity  by  permitting  the  deduction  of  taxes  of  like 
amount  and  character  laid  by  any  other  state  or  country  on  the  succc»- 
sion  to  property  situated  therein,  provided  a  guarantee  or  security  for  the 
payment  of  these  taxes  be  given.  If  the  foreign  taxes  are  less  in 
amount  than  tliosc  that  are  hereby  levied,  such  succession  becomes  tax- 
able tmder  this  law  to  the  extent  of  the  difference  between  the  taxes  paid 
or  guaranteed  in  the  foreign  jurisdiction  and  those  which  would  be 
collectible  under  the  Ohio  law. 

It  was  felt  to  be  very  necessary  to  establish  the  best  possible  admin- 
istrative  conditions  in  order  to  secure  the  largest  financial  results  and  to 
this  end  the  state  tax  commission  was  placed  in  general  charge  of  the  law 
The  county  probate  courts  are  given  jurisdiction  of  all  questions  that 
would  arise  not  only  with  respect  to  succession  by  death  but  also  with 
respect  to  succession  inter  vivos,  and  the  county  auditors  are  made  the  ap- 
praisers of  property.  The  assessment  of  taxes  is  made  by  the  probate 
court,  subject  to  the  appeal  of  interested  parties  including  the  tax  com- 
mission. As  a  means  of  securing  a  better  listing  of  property  for  taxa- 
ticm  during  the  life  of  the  owner,  as  well  as  to  promote  the  effectiveness 


59 


of  the  present  law,  section  5348-2  forbids  the  transfer  of  any  stocks,  or 
other  securities,  or  the  opening  of  any  safety  deposit  boxes,  unless  notice 
is  served  at  least  ten  days  prior  thereto  to  the  tax  commission  and  the 
county  auditor.  Representatives  of  either  of  these  officials  may  per- 
sonally examine  such  deposits,  securities  or  other  assets,  at  the  time  of 
delivery  or  otherwise. 

The  constitutional  requirement  of  distribution  has  been  observed, 
•  but  with  the  further  requirement  that  one-half  of  the  amount  assigned 
for  the  use  of  any  municipal  corporation  or  township  shall  be  credited 
to  the  sinking  fund  of  such  district,  if  any,  and  the  other  half  to  the 
general  fund.  The  fees  for  collection  and  the  other  expenses  of  ad- 
ministration are  paid  from  the  remaining  half,  the  residue  of  which 
is  turned  into  the  general  revenue  fund  of  .the -state. 

The  best  indication  of  the  proper  yield  of  the  inheritance  tax  is  the 
New  York  experience.  The  exemptions  and  schedules  of  rates  in  the 
New  York  law  are  not  exactly  identical  with  those  in  the  new  Ohio  in- 
heritance tax  law,  but  a  sufficient  parallel  exists  to  permit  of  a  deduction 
as  to  comparative  results.  The  average  yield  of  the  New  York  law  for 
the  five  full  fiscal  years,  1913  to  1918,  (omitting  9  months  in  1915-16 
because  of  a  change  in  the  fiscal  year)  was  $11,475,183.  On  the  assump- 
tion that  the  value  of  the  estates  probated  in  the  two  states  will  bear  the 
same  ratio  to  each  other  as  the  amounts  of  personal  incomes  returned 
under  the  Federal  Income  tax  law  in  1917,  the  yield  of  the  Ohio  inherit- 
ance tax  would  be  24.51%  of  the  New  York  yield,  or  $2,813,567.  If  we 
increase  these  figures  by  fifty  per  cent,  in  order  to  make  our  estimate 
perfectly  safe  we  get  $4,220,350,  which  is  probably  in  excess  of  the  yield 
to  be  expected  from  the  inheritance  tax  during  the  first  few  years  of  its 
operation.  In  tab^e  II  above  we  have  accepted  commissioner  Cassidy's 
estimate  of  a  $3,000,000  yield,  half  of  which  was  given  to  the  state,  a 
total  of  $3,000,000  for  the  biennium. 

We  are  presenting  also  a  bill  for  the  purpose  of  correcting  certain 
errors  which  were  inadvertently  retained  in  the  inheritance  tax  law  as 
originally  enacted.  The  nature  of  these  changes  will  be  clear  from  the 
italicised  portions  of  the  sections  which  are  to  be  affected  by  them. 

c.    The  License  Tax  on  Motor  Vehicles. 

The  recent  appearance  and  rapid  development  of  the  modem  motor 
vehicle  has  occasioned  much  difficulty  in  keeping  the  method  of  taxation 
of  such  vehicles  properly  adjusted  to  the  advance  of  the  industry,  and 
to  the  special  needs  for  improved  highway  construction  which  this  ad- 
vance has  brought  about.  Under  the  Ohio  constitution  the  automobile 
must  be  included  in  the  general  mass  of  property  which  is  listed  for 


6o 


taxation  at  property  tax  rates,  and  in  this  way  it  constitutes  a  measure 
of  taxable  capacity,  at  least  so  far  as  the  present  constitutional  theory 
of  taxation  is  concerned.  The  revenues  derived  from  the  property  tax 
on  autCMnobiles  properly  goes  for  the  general  uses  of  the  localities  or 
of  the  state,  to  the  extent  and  in  the  proportion  that  levies  on  property 
for  these  respective  uses  are  made. 

In  this  respect  the  automobile  is  no  different  from  any  other  form 
of  property,  and  as  long  as  the  uniform  rule  remains,  there  is  no  reason 
for  taxing  it  in  a  different  way  than  other  forms  of  property  are  taxed, 
as  property.  But  the  modem  motor  vehicles,  of  all  classes,  have  ^vcn 
rise  to  certain  special  problems  out  of  which  has  come  the  general  ten- 
dency to  impose  upon  such  vehicles,  as  the  active  agents  in  the  case, 
other  special  taxes,  levied  not  in  respect  of  the  vehicle  as  property,  but 
in  respect  of  the  use  of  the  public  highways  without  which  such  modem 
devices  are  very  impracticable.  In  other  words,  the  obligation  which 
devolves  upon  the  state  to.  establish  and  maintain  highways  of  com- 
munication and  transportation  becomes  increasingly  serious  with  the 
multiplicity  of  vehicles  now  using  such  highways,  and  with  the  mount- 
ing cost  of  construction  and  maintenance  of  roadbeds  of  sufficient 
strength  and  wearing  quality  to  resist  for  long  the  tremendous  strain 
of  modem  .motor  traffic.  It  is  perfectly  proper,  therefore,  that  the 
classes  of  vehicles  which  have  been  responsible  for  by  far  the  greater 
part  of  this  additional  public  burden  should  be  required  to  contribute 
in  a  special  manner  toward  its  support.  The  pressure  for  the  extensiwi 
and  continued  improvement  of  the  state's  system  of  highways  is  increas- 
ingly great  as  the  various  classes  of  motor  vehicles  become  more  widely 
diffused,  and  for  the  most  part  the  owners  of  such  vehicles  have  no 
objection  to  sharing  in  the  special  costs  which  are  here  involved.  The 
tax  which  we  are  here  preparing  is  not  a  property  tax  but  a  license  or 
{Mivilege  tax,  imposed  upon  the  privil^e  of  using  the  public  highways 
and  for  the  purpose  of  supporting  those  highways. 

Furthermore,  the  practice  of  transporting  merchandise  and  pas- 
sengers by  motor  vehicles  is  becoming  increasingly  general,  and  this 
means  that  the  state  is  under  the  compulsion  of  supplying  to  such  users 
of  the  highways  a  roadbed  and  a  right  of  way  for  transportation  pur- 
poses, which  would  be  constracted  and  maintained  witiiout  expense  to 
them  if  some  special  method  of  charging  for  this  use  were  not  devised. 
The  original  public  highways  were  paid  for,  in  many  instances,  by  tolls 
and  this  method  is  by  no  means  an  unfamiliar  one  today.  The  toll 
system  has  been  given  up  in  Ohio  for  many  years,  and  we  are  here 
proposing  what  we  regard  as  a  more  effective  measure  for  the  better 
disbributkm  of  the  cost  of  modem  road  construction  and  maintenance 


6i 


than  the  toll  system.    The  toll  is  suitable  for  a  local  undertaking,  «id 

was  found  at  its  best  in  the  local  development  of  the  roads  of  an  earlier 
period.  The  license  tax,  administered  by  the  state,  is  in  better  keeping 
with  the  statewide  problems  of  highway  construction,  supervision  and 
policing  which  have  come  with  modem  conditions  and  methods  of  travel. 

The  principal  objects  of  the  present  bill  for  the  taxation  of  motor 
vehicles  are  to  secure  a  krger  revenue  for  road  purposes  and  to  effect 
a  better  distribution  of  this  larger  contribution  among  the  various  classes 
of  owners  and  users  of  such  vehicles. 

The  Ohio  license  taxes  on  motor  vehicles  have  not  been  satisfactory 
heretofore  in  either  of  these  respects.  The  revenue  receipts  have  nec- 
essarily been  relatively  small  in  comparison  to  the  number  of  vehicles 
registered  because  of  the  low  flat  rate  imposed;  while  this  flat  rate 
has  meant  a  very  inequitable  distribution  of  burden  among  the  various 
classes  of  vehicles  to  which  the  law  was  applied.  The  total  collections 
of  the  state  automobile  department  are  shown  in  Table  III  above.  By 
far  the  largest  amount  ever  collected  in  a  single  year  was  the  yield  of 
$2,166,270  in  1918,  from  over  400,000  registrations.  But  in  the  fiscal 
year  1917-18  the  Connecticut  revenue  from  94,118  registrations  was 
$1,066,988,  in  addition  to  which  there  was  derived  $218,176  from  opera- 
tors' licenses,  or  a  total  of  $1,285,164.  Various  other  eastern  states 
have  been  deriving  a  very  substantial  amount  for  road  purposes  from 
their  automobile  license  taxes. 

As  little  <*an  be  said  in  favor  of  the  Ohio  system. of  a  flat  charge, 
from  the  standpoint  of  the  equity  of  distribution.  The  proper  basis 
of  distribution  of  such  a  tax  is  the  amount  of  damage  or  wear  caused 
to  the  highway  by  the  various  classes  of  vehicles.  The  flat  charge  makes 
possible  no  distinctions  on  account  of  the  chara-^ter  of  the  use,  whether 
for  private  profit  or  for  pleasure,  nor  for  weight  of  vehicle  or  for  engine 
power.  There  can  be  no  debate  over  the  principle  of  a  license  tax  which 
is  graduated  with  respect  to  the  chief  factors  involved  in  the  wear  and 
damage  to  the  highway. 

There  is  more  room  for  debate  and  for  honest  difference  of  opinimi 
as  to  what  constitutes  a  reasonable  graduation  or  adjustment  of  the 
rates  to  the  relative  importance  of  these  factors.  Following  its  policy  of 
seeking  the  best  advice  obtainable  with  regard  to  the  respective  subjects' 
under  consideration  the- committee  gave  as  much  time  as  was  desired  to 
the  representatives  of  various  organizations  interested  in  the  develop- 
ment of  better  highways,  and  to  those  interested  in  the  automobile 
industry,  including  the  State  Automobile  Association.  The  model  license 
tax  bill  recommended  by  the  National  Association  of  Automobile  Manu- 
facturers was  freely  drawn  upon  in  the  preparation  of  our  bill  and 


62 


we  have  adopted  the  general  policy  of  rate  determination  there  sug- 
gested, with  such  variations  as  seemed  necessary  because  of  the  fact 
that  automobiles  must  remain  taxable  as  personal  property.  An  alterna- 
tive proposal  as  to  rates  would  have  been  suggested  had  it  been  possible 
so  to  classify  motor  vehicles  as  to  relieve  them  in  part  or  entirely  from 
the  general  property  tax. 

The  rates  proposed  in  the  present  bill  are  in  two  schedules.  The 
first  is  applied  to  passenger  cars,  on  the  basis  of  horsepower,  the  tax 
ranging  from  $8.00  on  cars  having  twenty-five  horsepower  or  less  up  to 
$20  for  those  having  more  than  thirty-five  horse-power.  The  intermedi- 
ate group  pays  a  tax  of  $12.  The  second  schedule  applies  to  commercial 
cars  which  pay  the  same  rates  on  the  horse-power  basis  as  passenger 
care,  and  in  addition,  a  flat  tax  of  twenty  cents  per  hundred  pounds  gross 
we^ht  of  vehicle  and  load.  Trailers  are  to  be  taxed  at  the  same  rate 
as  commercial  cars  on  the  gross  weight  of  vehicle  and  load.  A  min- 
imum tax  of  $5.00  is  established  for  each  vehicle  other  than  motorcycles 
and  $2.50  for  each  trailer.  Fixed  weight  allowances  are  set  forth  for  pas- 
sengers carried  by  commercial  cars  and  formulae  are  suggested  for  the 
determination  of  horse-power.  Provision  is  also  made  for  prorating  the 
tax  by  the  quarter,  according  to  the  date  of  registration. 

It  was  our  object  to  prepare  a  tax  schedule  which  would  graduate 
the  burden  according  to  the  wear  and  damage  to  the  road,  and  would 
at  the  same  time  be  so  simple  in  administration  as  to  cause  the  least 
possible  difficulty^  to  the  taxpayer.  The  two  factors  which  cause  wear 
and  damage  to  the  road  are  weight  and  speed.  In  the  case  of  passenger 
cars  the  engine  power  is  usually,  though  not  always,  adjusted  with  some 
care  to  the  weight  of  the  vehicle  and  load.  The  exceptions  seemed  to 
us  so  unimportant  as  to  warrant  the  graduation  of  the  tax  on  the  basis 
of  horee-power  alone,  which  becomes  therefore  our  index  of  weight  and 
speed,  and  thus  of  wear  and  damage  to  the  road.  In  the  case  of  com- 
mercial vehicles  the  load  factor  becomes  of  so  much  greater  importance, 
relatively,  that  we  deemed  it  necessary  to  apply  a  separate  tax  to  this 
factor. 

The  tax  applied  to  manufacturers  of  or  dealers  in  motor  vehicles 
are  doubled  over  the  rates  contained  in  the  present  law. 

The  secretary  of  state  remains  in  general  administrative  charge,  as 
registrar  of  motor  vehicles.  The  county  auditor  is  made  a  deputy  r^s- 
trar.  who  is  to  act  for  the  secretary  of  state  in  receiving  applications  for 
r^stration  and  for  certified  copies  of  r^stration  certificates,  and  in  the 
collection  of  the  taxes  and  fees  provided  for  under  this  chapter.  He  is 
also  required  to  be  in  charge  of  the  local  distribution  of  the  number  plates 
and  certificates,  and  to  perform  such  other  duties  connected  with  this  act 


63 

as  the  secretary  of  state  may  require.  Any  responsible  citizen  or  organ- 
ization may  be  deputized  by  the  county  auditor,  at  the  direction  of  the 

secretary  of  state,  for  the  purpose  of  assisting  in  the  distribution  of 
r^istration  certificates  and  number  placards.  Such  special  deputies  shall 
give  bond  in  such  amount  as  the  secretary  of  state  may  prescribe.  They 
shall  receive  no  compensation  for  their  services,  but  all  or  such  part  of 
their  actual  and  necessary  expenses  may  be  paid  out  of  the  appropria- 
tion under  this  chapter  as  the  latter  official  may  allow. 

The  revenues  obtained  under  this  act  are  required  to  be  used  for 
road  maintenance  and  repair.  Fifty  percent  of  the  collections  are  to  be 
retained  for  local  use,  and  this  proportion  is  to  be  certified  by  the  county 
auditor  to  the  proper  r^stration  districts,  which  are  either  the  municipal 
corporations  or  the  county  in  which  the  owner  resides  or  in  which  he  has 
his  principal  place  of  business.  If  the  owner  resides  in  another  county, 
this  proportionate  share  of  the  collections  is  certified  to  the  secretary  of 
state,  by  whom  a  proper  redistribution  is  made.  In  the  several  local 
treasuries  such  money  is  to  constitute  a  fund  to  be  known  as  the  "Main- 
tenance and  Repair  Fund,"  the  assets  of  which  shall  not  be  subject  to 
transfer  to  other  funds.  In  other  words,  the  proceeds  of  the  automobile 
tax  are  to  be  used  for  road  maintenance  and  repair,  and  for  no  other  pur- 
poses. The  state's  share  shall  consist  of  the  remaining  fifty  percent,  less 
the  fees  and  other  costs  of  collection  and  administration,  and  this  share 
shall  Hkewise  be  credited  to  the  "State  Maintenance  and  Repair  Fund," 
subject  to  the  disposition  of  the  highway  commissioner.  Maintenance 
and  repaif",  as  used  in  this  section,  include  "all  work  done  upon  any  im- 
proved road  or  highway,  or  upon  any  street,  in  which  the  existing  founda- 
tion thereof  is  used  as  the  sub-surface  of  the  improvement  in  whde  or 
in  substantial  part." 

The  exact  yield  of  this  tax  in  Ohio  cannot  be  forecast  with  accuracy. 
On  page  53  above  we  have  made  use  of  a  very  tentative  estimate  of 
$7,000,000,  which  was  based  on  the  selection  of  several  thousand  cars  at 
random  from  the  r^stration  of  1919.  This  figure  is  probably  too  high. 

The  importance  of  providing  additional  funds  for  road  maintenance 
and  repair  is  shown  by  the  following  data  on  the  highways  of  the  state. 
The  total  highway  mileage,  classified  according  to  the  nature  of  construc- 
tion, is :  ^  . 


Earth  roads  ;   50,843.1  miles 

Gravel  roads  ••   16,555.8  miles 

Cinder  roads'  .;  ^   86.9  miles 

Macadam  roads    14,936.4  miles 


64 


Concrete  roads    517  4 

Bituminous  roads    33  5 

Brick  roads   ^  ^  ^ 

Total  roads   83,842.2  miles 


These  figures  show  that  about  four-fifths  of  the  state's  highways 
are  yet  to  be  improved.  The  state  is  at  present  constructing  about  600 
miles  per  year,  and  is  co-operating  with  the  counties  in  the  reconstruction 
of  some  600  miles  more  each  year.  At  this  rate  it  will  require  more 
than  fifty  years  to  improve  the  unimproved  roads  included  in  the  above 
table.  No  one  is  more  impatient  of  slow  progress  in  this  direction  than 
the  motorist,  and  no  one  stands  to  gain  more  than  he  from  more  rapid 
advance.  He  should  at  least  be  willing  to  pay  his  part  of  the  special 
costs  of  highway  improvement  and  maintenance. 

In  addition  to  the  new  construction  above  mentioned,  the  state  is 
now  paying  a  part  of  the  cost  of  maintaining  county  improvements  on 
the  state  road  system,  under  the  policy  set  forth  in  section  1224  of  the 
General  Code.  In  all,  there  will  be  available  for  ocnstruction  purposes 
m  1920  the  following  sums,  according  to  an  estimate  furnished  by  the 
Ohio  Good  Roads  Federation: 


From  the  s*ite   $4,800,000 

From  the  federal  government   3,708  000 

From  the  counties  in  coaperation  with  the  state   10,000,000 

From  the  counties  for  local  county  roads   7,000,000 


'^^^   •  $25,508,000 


Of  this  amount,  $21,800,000  will  be  produced  by  taxes  on  property. 
It  is  reasonable  to  assume  that  if  the  new  construction  is  financed  by  the 
property  taxes  the  maintenance  and  repair  should  be  met,  in  con- 
siderable part  at  least,  by  charges  against  the  traffic.  In  this  connection 
It  must  be  borne  in  mind  that  the  cost  of  maintenance  and  repair  will  in- 
crease as  the  network  of  improved  highways  is  extended.  In  time  this 
improvement  will  reach  a  point  beyond  which  the  annuar  outlay  for 
such  purposes  will  be  reduced  materially,  as  in  some  other  states,  in 
which  the  amount  annually  spent  on  new  work,  is  much  less  than  the 
outlay  for  maintenance  and  repairs.  When  this  time  comes  a  larger 
portion  of  the  road  taxes  on  property  may  be  used  for  maintenance,  and 
a  readjustment  of  the  charges  on  traffic  may  be  considered.  Until  that 
lime  arrives,  however,  the  policy  of  a  considerable  license  tax  for  road 
maintenance  and  repair  finds  ample  justification  in  the  universal  demand 
for  an  extension  and  improvement  of  the  state  highway  system. 


65 


d.   The  UmitoHan  of  local  indebtedness. 

We  have  outlined  in  Chapter  II  above  the  present  provisions  for  local 
debt  limitation.  It  was  there  pointed  out  that  our  experience  with  statu- 
tory debt  limitation  has  not  been  satisfactory,  for  as  soon  as  the  limits 
established  threatened  actually  to  limit  debt  creation  these  limits  were 
changed  in  such  a  way  as  to  become  ineffective  as  a  restraint.  We 
cannot  accept  this  conception  of  a  debt  limitation,  which  is  on  its  face 
a  pure  farce.  On  the  other  hand  we  understand  perfectly  the  com- 
plaisance with  which  the  general  assembly  and  the  people  have 
viewed  this  situation.  There  has  been  stronger  popular  sentiment 
behind  the  strict  observance  of  the  tax  limit  law  than  there  has  been 
behind  the  debt  limit  law,  and  it  is  only  natural  that  the  weaker  limit 
should  yield.  Indeed,  so  great  has  been  the  general  insistence  upon 
the  sanctity  of  the  tax  limits  that  there  has  been  no  difficulty  or  hesi- 
tation over  the  wholesale  funding  of  deficits,  and  there  are  dotd>tless 
many  persons  in  the  state  who  still  firmly  believe  that  such  a  tax 
limit  law  has  actually  succeeded  in  limiting  expenditures. 

Our  proposal  for  debt  limitation  comes  to  the  general  assembly 
in  the  form  of  a  joint  resolution  providing  for  the  submission  of  a 
constitutional  amendment.  We  have  decided  to  recommend  the  limi- 
tation as  an  amendment  rather  than  a  staute,  because  of  its  relative 
*  importanice,  and  because  of  the  greater  need  of  making  it  secure. 
Wa  dedra  to  reiterate  our  setded  judgment  that  ^wluHb  m  Haauk  on 
tax  rates  is  good,  an  effective  limit  on  debts  is  vastly  better,  and  that 
th  force  of  popular  sentiment  should  be  built  up  back  of  the  latter 
rather  than  the  former.  It  is  of  much  less  importance  that  tax  rates 
be  limited  than  it  is  that  localities  should  more  neariy  pay  as  they  goi. 
We  have  emphasized  the  tendency  for  debt  limits  to  give  way  before 
the  pressure  of  rising  tax  rates.  In  order  to  prevent  this,  the  debt 
limit  should  be  made  more  secure  from  the  attack  of  those  who  would 
avoid  immediate  payment  for  what  they  get.  As  a  constitutional 
amendment  it  will  have  this  greater  security,  while  it  will  operate 
with  immensely  increased  effectiveness  as  an  actual  check  or  limita- 
tion to  restrain  the  excessive  and  improper  use  of  public  credit.  In 
our  judgment  it  will  not  have  the  effect  of  denying  to  any  community 
that  use  of  public  credit  which  is  compatible  with  a  sound  theory  of 
the  use  of  public  credit. 

Our  theory  of  public  credit  is  that  it  is  a  valuable  public  resource 
which  should  be  used  to  supplement  the  taxation  resources,  and  never 
as  a  means  of  evading  taxation.  It  should  never  be  resorted  to,  therefore, 
for  the  purpose  of  covering  operating  deficits,  nor  for  financing  im- 
provements which  by  their  nature  and  by  the  frequency  of  their  recur- 


% 


66 


rence.  are  propwly  charges  against  current  revenues.  A  temporary 
loan  in  anticipation  of  revenues  may  be  permissible  if  occasioned  by 
emergency  outlays,  but  if  this  practice  becomes  frequently  necessary  it 
.s  convmcng  evidence  of  the  inadequacy  and  inelasticity  of  the  public 
revenues.  A  revision  of  the  tax  laws  is  far  wiser  in  such  circumstences 
than  the  continued  funding  of  operating  deficits. 

_  PuWic  credit  may  properly  enough  be  used,  under  certain  con- 
ditions, to  provide  improvements  which  are  self-sustaining;  the  funda- 
mental condition  here  being  that  the  revenues  or  collections  from  such 
improvement  be  irrevocably  pledged  to  the  payment  of  interest  and  sink- 
ing fund  charges.  As  an  additional  safeguard  the  investor  would  doubt- 
less insist  that  the  general  credit  of  the  borrowing  district  be  also  pledged 

,r„«*^ ]■  ".P"^'  """"^^^  j"''g"'<="t'  furthermore, 

to  use  the  public  credit  for  the  construction  of  non-self  sustaining  im- 
provements of  such  scope  and  cost  as  would  produce  an  excessive  burden 
,  "^"^  concentrated  in  one  or  two  tax  years.  The  main 
test  of  the  legitimacy  of  the  use  of  public  credit  for  non-selfsustaining 
miprovement  becomes,  therefore,  the  period  of  time  within  which  the  out- 
lay m  question  may  be  expected  to  recur. 

We  may  illustrate  this  point  by  the  case  of  school  buildings.  The 
school  population  of  Qeveland,  Cincinnati,  and  other  large  cities  of  the 
state  IS  mcreasmg  at  such  a  rate  as  to  require  the  construction  of  one  or- 
more  new  school  buildings  each  year.  As  long  as  this  rate  of  increase 
continues  the  outlays  for  school  buildings  should  be  viewed  as  current 
expense  and  should  be  provided  from  current  revenues.  The  policy  of 
borrowing  money  for  such,  construction  means  a  vastly  increased  cost  of 
school  buddings,  for  the  taxpayers  must  not  only  pay  taxes  enough  in 

J^JJ  to  cover  the  interest 

«»  the  deferred  mstallments  of  debt  redeemd,  and  in  time  these  interest 
diarges  may  exceed  the  current  cost  of  additions.  For  example,  the 
Clveland  school  debt,  less  sinking  funds,  on  July  i.  1919,  was  $io,7n  277 
At  an  average  interest  rate  of  5%  this  means  that  the  taxpayers  of  the 
aty  are  paying  out  $535,675  annualty,  or  almost  the  price  of  two  new 
schoolbuildings.  for  the  privilege  of  financing  their  building  program  in 

^  But  the  small  city  or  the  village,  which  needs  a  single  new  building 
at  infrequent  intervals,  could  not  pay  for  such  improvements  as  a  current 
expense  without  adding  a  very  heavy  tax  burden  for  one  or  two  years 
The  total  cost  of  a  building  paid  for  by  a  loan  will  be  much  ^eater,  and 
yet  we  have  here  a  case  of  the  necessary  and  legitimate  use  of  public 
credit.  In  the  same  way  a  great  auditorium  or  other  large,  unique  under- 
trfang,  ev«i  by  a  large  city,  may  properly  enough  be  financed  by  loans 


67 

Distinctions  of  the  sort  which  we  have  here  hastily  outlined  can 
only  be  set  up  by  proper  administrative  control,  and  not  by  statutory 
enactment.  It  is  not  feasible  at  this  time  to  undertake  to  prescribe  the 
kind  of  administrative  control  over  debt  creation  which  would  permit 
the  realization  of  these  standards,  and  we  have  therefore  attempted  to 
secure  somewhat  similar  results  by  proposing  such  debt  limitations  upon 
as  will  compel  careful  observance  of  the  sound  principles  underlying  debt 
creation  and  management. 

The  limitations  which  our  recommendation  sets  up  are  the  following: 

1)  A  limit  on  the  total  net  general  debt,  that  is  the  debt  which  must 
be  carried  by  levies  against  the  general  mass  of  property. 

2)  A  two-fold  limitation  on  the  maturity  of  all  debts,  consisting  of 

a)  a  maximum  limit  of  forty  years  maturity,  and 

b)  a  further  restriction  of  the  maturity  to  the  probable 
life  of  the  improvement. 

3)  A  limit  of  eight  years  on  the  maturity  of  emergency  debts. 

The  basis  of  the  first  limitation  is  the  assessed  valuation  of  the 
taxable  real  property  in  the  borrowing  district.  Th^  reason  for  adopt- 
ing real  property  as  the  measure  of  the  general  debt  is  that  the  real 
property  valuation  is  subject  to  less  fluctuation  than  the  total  valuation, 
including  personal  property.  The  uncertainty  of  the  results  which  may 
attend  the  efforts  to  secure  a  larger  return  of  person  property  makes  it 
appear  probable  that  this  fluctuation  will  not  abate  in  the  future.  For  a 
similar  reason  we  have  also  excluded  the  value  of  mines  and  mineral 
rights,  for  as  the  underlying  deposits  are  exhausted  the  valuation  upon 
which  the  debt  limit  rests  declines. 

The  actual  percentages  which  have  been  used  were  determined  ex- 
perimentally, except  for  townships.  We  have  calculated  the  ratio  of  debt 
outstanding  on  July  i,  1919,  to  the  assessed  valuation  of  real  estate  for 
1918,  for  85  counties,  53  cities,  53  city  school  districts,  and  33  villages. 
The  range  of  these  ratios  for  each  district  is  shown  herewith.  In  the 
case  of  the  city  school  districts  the  sinking  funds  were  deducted,  but 
accurate  data  were  not  available  for  the  determination  of  the  amounts 
held  in  sinking  funds  against  the  general  debt  of  counties,  cities  and 
villages,  as  distinguished  from  the  assessment  and  puWic  utility  ddbts,  and 
in  these  cases  the  ratios  represent  the  ratio  of  gross  debt  to  assessed  valu- 
ation of  real  estate.  Since  the  net  debt  would  be  a  smaller  figure,  the 
ratios  allow  somewhat  greater  leeway  than  actually  appears. 

I.     RANGE  OF  COUNTY  RATIOS. 

Number  of  Counties  having  a  Ratio  of  General  Debt  to  Assessed 
Valuation  of  Real  Estate,  of 


68 


Less  than   23 

54%  to  1%  .'***' Yj 

1%  to    27 

154%  to  2%   g 

Over  2%  !.]..!!!!.*!.!!!!  lo 


2.     SAME,  FOR  CITIES  AND  CITY  SCHOOL  DISTRICTS 


City  School 

CiHes 

Districts 

Less  than  1%  

8 

1%  to  2%  

83 

2%  to  3%  

15 

3%  to  4%  

5 

4%  to  5%  

over  2 

6%  to  6%  

Over  6%   

3-     SAME  FOR  VILLAGES 

•  •  w...^   3 

  •   -r  i   6 


7 
10 
4 


Less  than  1% 
1%  to  2%... 
2%  to  3%... 
3%  to  4%... 
4%  to  5%... 
Over  5%  ... 


We  did  not  attempt  to  distinguish  cities  and  villages  in  the  limits 
provided,  but  set  a  limit  of  4J4%.  for  all  municipal  corporations.  In  es- 
tablishing the  legal  limits  it  was  not  considered  wise  to  use  the  highest 
ratios  found  for  each  class.  To  be  effective  the  limit  should  really 
operate.  ^  On  the  other  hand  we  have  no  desire  to  penalize  those  local 
units  which  now  have  a  ratio  higher  than  the  established  limit  for  the 
class.  Our  plan,  accordingly,  provides  that  in  such  event  the  further 
excess  borrowing  power  of  such  a  district  in  any  year  shall  be  limited  to 
50%  of  the  amount  paid  to  sinking  fund  in  that  jrear.  We  have  also  pro- 
posed that  a  special  levy  of  not  to  exceed  2  mills  may  be  voted  for  sinking 
fund  purposes  if  it  is  desired  to  increase  this  margin.  Snch  a  restriction 
in  time  will  bring  every  district  within  the  limits  now  set  and  thereafter 
diese  limits  shall  apply  and  be  observed. 

The  percentages  which  we  propose  are  for  the  limitation  of  the 
general  debt  only.  We  have  excluded  therefrom  bonds  issued  in  anticipa- 
tion of  special  assessments  for  the  improvement  of  property  and  those 
ittued  for  the  abstraction  or  acquisition  of  public  utilities,  to  the  extent 
that  the  latter  are  self-sustaining.  If  a  community  prefer  that  a  publicly 
owned  utility  be  not  self-sustaining  this  choice  will  mean  a  reduction  of  the 
general  borrowing  power  to  the  extent  necessary  to  provide  the  interest 


69 


and  sinking  fund  charges  s^inst  such  public  utility  debt  outstanding.. 
The  general  borrowing  power  of  such  a  unit  may  be  increased  by  raising 
the  rates  of  the  commodity  or  service  supplied  through  the  publicly 

owned  utility.  In  the  event  that  a  community  desires  to  enter  a  new  field 
of  public  ownership  or  activity,  we  have  provided  that  bonds  for  this 
purpose  may  be  issued  outside  of  the  ratios  here  set  up  provided  the 
future  income  of  the  undertaking  be  pledged  to  the  payment  of  interest 
and  sinking  fund  charges.  This  proviso  carries  with  it,  by  implication, 
the  agreement  to  fix  such  rates  as  will  yield  the  necessary  amounts. 
Emergency  bonds  for  certain  purposes,  tmder  proper  safeguards,  are  also 
excluded  from  the  limits. 

It  is  clear  that  such  a  plan  of  limiting  indebtedness  will  operate  far 
more  effectively  to  restrain  borrowing  than  a  severe  tax  rate  limitation. 
With  these  provisions  in  operation  there  should  be  such  modifications  in 
the  tax  rate  limits  as  may  prove  necessary,  in  order  to  permit  full  and 
complete  con-pliance  with  the  debt  retirement  program  that  is  here  made 
compulsory.  We  recommend  that  modifications  of  this  character  be  made 
as  may  be  required  in  order  to  sustain  the  restrictions  on  debt  creation 
here  established.  . 

e.    The  school  relief  bill. 

We  have  discussed  at  some  length  in  Chapter  II  the  situation  of  the 
schools  and  in  that  discussion  we  dwelt  particularly  upon  the  relation 
of  the  state  to  the  educational  system,  and  upon- the  state's  obligation  to 
insure  tht  provision  for  certain  educational  minima.  We  have  also  sur- 
veyed the  existing  sources  of  state  revenue  and  from  this  survey  it  be- 
comes clear  that  the  state  would  be  unable  to  discharge  this  obligation 
adequately  from  its  present  revenues  from  indirect  taxes.  Nor  would 
it  be  possible  to  rely  upon  the  new  indirect  taxes  for  school  relief.  Their 
^ggr^te  yield  would  scarcely  provide  the  necessary  revenues,  if  all 
could  be  devoted  to  such  use;  but  the  constitution  requires  the  assign- 
ment of  at  least  50%  of  the  receipts  from  these  taxes  to  the  mu  licipal 
corporations  and  townships  in  which  the  taxes  originated.  The  only  re- 
source, therefore,  whereby  a  sufficient  revenue  might  be  obtained  to  meet 
the  school  program  adequately  seems  to  be  a  direct  levy  on  the  property  of 
the  state. 

In  the  preparation  of  the  bill  for  school  relief  we  have  again  fol- 
lowed our  usual  practice,  and  have  consulted  freely  with  many  persons 
whose  special  qualifications  entitle  their  opinions  and  suggestions  in  the 
school  problem  to  respect.  We  have  had  valuable  assistance  from  repre- 
sentatives of  the  state  and  national  or^nizations  of  teachers  in  devdop- 
ing  the  i^n  which  we  have  adopted. 


70 

The  principal  object  of  this  bill  is  to  create  larger  funds  for  the 
payment  of  salaries  to  teachers  and  for  other  school  expenses.  This 
object  we  have  sou^^t  to  accomplish  by  providing  for  a  state  levy,  so- 
called,  of  1.7  mills,  and  a  county  levy  of  i  mill,  to  be  distributed  as 
hereinafter  described.  The  local  levy  for  school  purposes  is  reduced 
from  5  to  3  mills,  and  in  order  to  make  compliance  with  the  10  mill 
limit  possible  the  township  limit  is  reduced  to  ij^  mills,  while  the  present 
state  levies  for  universities,  cmnmcm  schools  and  state  sinking  fund 
are  abolished.  The  net  gain  to  school  districts  from  the  new  state  levy 
will  be  the  difference  between  1.7  mills  and  .15  mills,  the  total  of  the 
three  state  levies  herewith  cancelled.  The  net  gain  to  the  state  general 
revenue  fund  will  be  the  difference  between  the  receipts  from  these 
levies  and  the  amount  now  paid  out  of  that  fund  in  support  of  common 
schools.  In  Table  II  above  we  have  estimated  that  this  saving  would 
.  have  been  about  $1,700,000  in  1918. 

A  special  tuition  levy  of  i  mill  is  also  proposed,  to  be  subject  only 
to  the  15  mill  limitation.  The  total  levies  on  property  thus  far  proposed 
for  school  purposes  are  advanced  from  5  mills  to  6.7  mills,  of  which  5.7 
mills  will  be  subject  to  the  10  mill  limit  and  i  mill  subject  only  to  the 
15  mill  limit.  In  the  event  that  a  school  district  is  at  present  near  the 
limit  of  the  levies  which  are  subject  to  the  10  and  15  mill  restrictions, 
respectively,  scHne  further  elasticity  will  doubtless  prove  necessary.  This 
dement  is  secured  by  including  the  device  which  was  adopted  last  spring 
as  an  emeigency  measure  and  we  propose  to  authorize  boards  of  edu- 
cation to  levy  up  to  2  mills  outside  of  the  15  mill  limit.  Section  5649-5 
now  authorizes  such  levy  outside  of  the  10  mill  limit,  and  we  are  simply 
proposing  that  2  mills  of  such  levy  be  permitted,  subject  to  no  restric- 
tions. 

The  additional  local  elasticity  which  is  thus  assured  is  made  the 
more  necessary  by  reason  of  the  plan  for  the  distribution  of  the  funds 
secured  from  the  state  and  county  levies,  as  will  appear  from  an  ex- 
amination of  the  system  of  distribution. 

This  plan  of  distribution  is  as  follows.  First  the  sum  of  $500,000 
is  to  be  set  aside  from  the  proceeds  of  the  state  levy  as  a  reserve  fund 
for  the  equalization  of  educational  opportunities  throughout  the  state. 
The  disposition  of  this  reserve  fund  will  be  described  later.  Of  the  re- 
mainder, which  is  designated  "The  State  Common  School  Fund",  such 
amount  shall  be  set  aside  as  will  cover  the  allotment  required  on  the 
basis  of  teachers  employed  and  salaries  paid,  and  the  remainder  shall 
be  apportioned  among  the  counties  on  the  basis  of  the  enumerated  youth 
of  school  age.  Each  coimty's  share  shall  be  apportioned  to  the  school 
districts  and  parts  of  districts  therein  on  the  basis  of  the  aggr^[ate  at- 


71 


tWdanbe'  6f  pupilsi  The  sum  distributable  on  account  of  teachers  Is 
apportioned  in  ah  amount  equal  to  25%  of  the  salary  paid  to  any 
teacher  who  receives  $800  or  more,  but  in  no  event  more  than  $350  to 
any  teacher.  Only  such  teachers  shall  be  included  in  this  apportion- 
ment as  are  qualified  to  hold  certificates  other  than  tem^raty  oY-  elncr-- 
gency  certificates.  The  proceeds  of  the  county  levy  shall  be  distributee^ 
in  the  same  manner  as  the  state  levy,  except  that  the  county  shall  dis- 
tribute to  the  sdiool  districts  on  the  basis  of  teachers  employed  an 
amount  equal  to  125^%  of  the  salary  paid  to  those  teachers  receiving 
$800  or  more,  but  in  no  event  more  than  $175  to  each  teacher,  and  the 
remainder  in  proportion  to  the  aggregate  days  of  attendance. 

Such  is,  in  brief,  the  central  feature  of  our  plan  for  greater  sup- 
port of  common  schools.  The  two-fold  plan  of  distribution  emphasizes 
the  salary  paid  to  teachers  and  the  length  of  term.  The  minimum 
salary  of  $800  must  be  paid  before  aid  from  the  state  and  county 
levies  may  be  had,  but  when  this  minimum  is  reached  the  state  and 
county  together  pay  375^%  of  it,  or  any  other  salary  paid  up  to  $1,400. 
This  reasonable  upper  limit  to  state  and  county  aid  is  inserted  in  order 
to  prevent  the  wealthy  school  district  which  is  able  to  pay  large  salaries 
from  absorbing  an  imdue  share  of  the  two  levies  when  their  needs 
were  relatively  lesd  than  those  of  other  districts  in  the  same  county. 
The  further  restriction  to  those  teachers  whose  professional  qualifications 
entitle  them  to  regular  certificates  is  in  line  with  the  policy  of  requiring 
professional  training  of  teachers  which  has  already  been  introduced 
in  this  state.  It  is  quite  in  harmony  with  our  emphasis  upon  the  state's 
obligation  in  education  to  provide  in  a  financial  relief  bill  for  the  protec- 
tion of  those  standards  which  the  state  is  setting  up  for  the  improvement 
of  the  quality  of  instruction. 

It  was  necessary  to  change  numerous  other  sections  of  the  General 
Code  in  order  to  preserve  consistency  between  the  existing  school  laws 
and  the  new  sections,  and  the  remainder  of  the  bill  is  largely  devoted 
to  these  correctional  amendments.  The  principal  changes  which  were 
necessary  were  the  following: 

i)  In  section  7575  the  former  levies  of  .055  mills  for  common 
schools  and  .0025  mills  for  sinking  fund  are  abandoned,  and  the  amount 
of  state  aid  which  was  rendered  under  these  levies  is  absorbed  in  the 
larger  "State  common  school  fund"  which  is  created  by  the  levy  of  1.7 
mills.  The  amounts  which  the  state  is  obligated  to  pay  as  interest 
on  the  irreducible  debt  will  continue  to  be  paid  to  the  districts  which 
are  entitled  to  receive  them,  as  determined  by  the  auditor  of  state,  but 
the  money  for  this  purpose  will  now  come  from  the  state  general  revenue 
fund.    The  levies  for  the  several  state  universities  are  repealed  entirely 


72 


in  order  to  make  greater  leeway  for  common  school  snpport  within 
the  interior  tax  rate  limitations. 

2)  Section  7600  provides  for  the  new  plan  of  distribution  which 
has  already  been  outlined.  The  latter  part  of  this  section  was  intended 
to  correct  the  inequalities  arising  in  the  case  of  those  districts  which 
are  entitled  to  receive  interest  on  the  common  school  fund,  otherwise 
known  as  th^  irreducible  debt  of  the  state,  and  the  income  from  unsold 
school  lands.  This  capital  constitutes  a  kind  of  endowment  for  these 
districts,  an  income  over  and  above  what  is  being  received  from  the 
local  school  levies  on  property.  These  fortunate  districts  are  entitled 
to  some  advantage,  and  this  is  recognized  in  the  proposed  terms  of 
section  7600.  The  endowment  or  trust  income  is  to  be  paid,  as  here- 
tofore; but  an  amount  equal  to  75%  of  such  income  is  to  be  deducted 
from  the  allolixient  to  such  district  on  the  basis  of  teachers'  salaries  and 
aggregate  attendance  of  pupils.  The  sums  so  deducted  shall  be  added  to 
the  amounts  available  for  distribution  in  the  remainder  of  the  county. 

4)  Section  76001  is  new.  It  provides  for  the  apportionment  of 
the  amount  which  may  be  received  from  the  state  and  cities  by  parts  of 
school  districts,  in  the  event  that  such  districts  be  in  two  or  more  counties. 
The  whole  number  of  teachers  employed  and  the  aggr^te  attendance 
of  pupils  for  such  parts  of  districts  is  to  be  determined  by  the  proportion 
which  the  enrollment  of  pupils  from  such  parts  of  district  was  to  the 
total  enrollment  of  the  district. 

4)  Section  7603  is  amended  so  as  to  include  the  amount  received 
from  the  state  and  the  proceeds  of  the  county  levy  in  the  "tuition  fund" 
to  be  used  for  the  payment  of  the  salaries  of  teachers  and  superin- 
tendents only. 

5)  Our  program  of  more  careful  and  adequate  provision  for  debt 
retirement  and  more  severe  limitation  on  debt  creation  called  for  an 
amendment  of  section  7613.  This  section  at  present  requires  boards 
of  education  to  set  aside  for  bonds  for  which  no  sinking  fund  levy  had 
been  made  an  amount  equal  to  1/40  of  such  debt.  Presumably  the 
sums  so  provided  are  to  be  carried  as  a  sinking  fund,  but  this  is  not  so 
stated,  in  terms,  and  in  any  case  an  amortization  rate  is  prescribed  with 
iio  r^rd  to  the  maturity  of  the  debt.  We  have  changed  this  require- 
ment to  cover,  definitely,  the  obligation  to  provide  a  sinking  fund  for 
the  retirement  of  bonds  so  outstanding. 

6.  Sections  7736,  7747  and  7751  relate  to  the  payment  of  tuition 
for  grade  and  high  school  pupils  in  the  event  that  they  attend  school  in 
another  district,  whether  by  reason  of  distance  or  the  lack  of  proper 
sdiool  facilities  in  the  district  of  residence.  The  tuition  to  be  charged 
m  such  cases  is  to  be  based  on  the  average  monthly  cost  per  capita  of 


73 


ccmducting  the  schools  so  attended  by  pupils  who  are  n<Mi-residcnts  of 
the  district.  Our  amendments  to  the  first  two  secticms  provide  for  de- 
ducting the  amounts  apportioned  to  the  districts  from  the  state  com- 
mon school  fund  and  the  county  levy  from  the  gross  expenses  of  con- 
ducting such  school  before  computing  the  tuition  to  be  charged  pupils 
from  another  district.  The  apportionment  of  funds  to  such  district  will 
be  influenced  by  the  number  of  such  non-resident  pupils  in  attendance 
and  the  inclusion  of  the  state  and  county  aid  as  outlays  would  mean  an 
unnecessary  inflation  of  the  cost  of  school  operation  for  the  purpose  of 
determining  the  tuition  charge. 

The  fund  of  $500,000.00  which  is  to  be  set  aside  as  a  reserve  for 
the  equalization  of  educational  opportunities  throughout  the  state  is  our 
proposed  substitute  for  the  present  system  of  state  aid  to  weak  school 
districjks,  which  is  hereby  abandoned.  It  is  anticipated  that  the  above 
described  features  of  our  bill  will  greatly  reduce  the  number  of  sttdi 
districts,  but  we  are  creating  the  above  fund  to  cover  the  possible  cases 
and  are  introducing  certain  changes  in  the  administration  of  this  relief. 

The  principal  administrative  change  is  to  place  the  superintendent 
of  public  instrtiction  in  control  of  the  distribution  of  the  fund,  and  to 
substitute  for  the  fixed,  mechanical,  and  to  some  extent  demoralizing 
rules  now  determining  the  grant  of  state  aid  a  more  vital  and  flexible 
system,  based  on  personal  inspection  and  supervision  under  our  plan. 
No  district  shall  be  entitled  to  receive  aid  from  the  reserve  fund  until 
after  its  application  is  approved  on  the  basis  of  a  personal  inspection 
of  its  equii^nent,  its  accounts  and  its  standards  of  instruction.  This  aid 
may  be  withdrawn  at  any  time  unless  the  proper  standards  continue  to  be 
maintained,  and  in  order  to  secure  such  degree  of  proper  observance  the 
superintendent  of  public  instruction  is  given  ccmiplete  control  over  tiic 
disposition  of  the  fund. 

f .   The  Income  Tax. 

The  procedure  which  the  committee  followed  in  the  prei>aration  of 
the  income  tax  bill  was  the  same  as  that  observed  in  drafting  the  inherit- 
ance tav  law.  That  is,  we  gave  careful  attention  to  the  experience  of 
those  states  which  appear  to  have  had  the  best  results  with  income  tax- 
ation, and  we  did  not  hesitate  to  draw  freely  upon  this  experience.  Wc 
have  had  at  hand,  too,  the  text  of  the  federal  income  tax  law.  In  this  very 
difficult  field,  however,  we  felt  especially  the  need  of  first-hand  study 
and  our  economic  advisor  was  instructed  to  visit  certain  states  and  pre- 
pare a  report  upon  the  operation  of  the,  income  taxes  in  those  states. 
This  report  will  be  found  in  the  appendix. 

The  proposed  income  tax  bill  falls  naturally  into  two  divisions,  the 
first  dealing  with  the  determination  of  taxable  income  and  the  second  witfi 


74 

the  administrative  provisions.  It  is  unnecessary  to  analyze  the  bill  in 
detail,  and  we  shall  not  undertake  here  more  than  a  brief  comment  upon 
Certain  features. 

1.  The  tax  is  to  be  imposed  only  upon  the  incomes  of  persons  who 
are  residents  of  the  state;  but  all  income  received  by  residents  of  the 
state,  fnHHl  whatever  source  derived,  is  to  be  included  in  the  return  of 
inccMne.   Corporate  and  partnership  incomes,  as  such,  are  not  to  be  hir- 
duded,  because  it  is  our  aim  to  reach  the  taxpaying  capacity  of  individi- 
uals,  and  it  is  well-known  that  taxes  imposed  upon  business  concerns  do» 
not  ordinarily  stand  as  a  burden,  but  are  shifted  as  a  part  of  the  expenses- 
of  the  business.    We  recognize,  too,  that  the  income  tax  could  not  in- 
equity be  extended  to  business  corporations  without  a  complete  readjust- 
ment of  the  system  of  corporate  taxation  now  in  vogue.   As  we  have* 
pointed  out  above,  such  a  readjustment  involves  a  further  readjusonent- 
of  die  whc^e  system  of  state  revenues,  and  with  this  problem  we  have^ 
done  nothing  more  than  to  call  attention  to  certain  of  its  aspects..  We-* 
have  been  impressed  by  the  recommiendations  contained  in  the  Plan  for 
a  Model  System  of  State  and  Local  Taxation,  by  a  committee  of  the  Na- 
tional Tax  Association,  to  the  effect  that  a  state  income  tax  should  be 
levied  on  the  income  of  persons  only,  and  npoa  the  total  income  of  all 
persons  who  are  residents  of  the  state  and  none  other.  Very  early  in  our 
ckliberations  on  this  subject,  therefore,  the  deddon  was  reached  to  pre-, 
pare  a  \All  along  this  line. 

2.  The  definition  of  gross  income  follows  closely  that  contained  in 
tfie  federal  law.  It  is  defined  broadly  to  include  income  and  gains  of 
every  sort,  whether  derived  from  a  regular  pursuit  or  business,  or  from 
incidental  transactions  or  occupations  of  any  nature.  In  section  5773-1, 
paragraph  8  we  have  expressly  excluded  stock  dividends  from  taxable 
inccMne.  We  undmtand  that  a  different  rule  obtains  in  the  federal  prac- 
tice, and  that  the  matter  is  now  pending  before  the  United  States  Su- 
preme Court.  It  is  our  judgment,  however,  that  transactions  of  this  sort 
do  not  result  in  the  appearance  of  income,  and  we  are  therefore  excluding 
them  from  the  definition  of  taxable  income. 

3.  The  prc^r  taxation  of  the  gain  resulting  f  rwn  the  sale  or  trans- 
fer of  capital  assets  presented  a  very  difficult  problem  to  the  conmiittee, 
ay  it  has  to  others  who  have  undertaken  to  deal  with  it.  The  plan  pro- 
posed in  section  5773-5  represents  a  compromise  whereby  we  sought  to 
secure  some  revenue  from  the  accretions  of  capital  increment  realized  as 
income  through  sale  or  exchange,  and  at  the  same  time  to  avoid  excessive 
restraint  upon  the  alienation  of  property  such  as  would  be  induced  by 
Ae  necessity  of  reporting  Ac  whole  increase  in  capital  value  wfaidi  had 
accrued  over  a  l<mg  period  as  taxatde  income  for  die  .year  ot  sale  or 


75 

transfer.  The  solution  is  a  twofold  compromise.  First,  we  have  limited 
the  accretion  of  value  which  shall  be  taxed  to  that  which  has  come  in  the 
three  years  preceding  the  date  of  sale  or  transfer,  but  in  no  case  prior 
to  January  i,  1919;  and  seccmd,  we  have  extended  to  the  ta3q>ayer  the 
option  of  keeping  an  inventory  according  to  which  ht  may  report  and  pay 
taxes  upon  the  annual  increase  of  value  as  it  occurs,  before  a  sale  or 
transfer  has  actually  been  made,  whether  in  anticipation  of  such  a  trans- 
action or  not.  In  the  event  of  realization  the  amount  of  taxable  gain 
shall  be  asstuned  to  have  accrued  at  a  uniform  rate  over  the  three-year 
period  and  shall  be  taxed  at  the  rates  for  the  respective  years.  A  re- 
vised return  may  be  required  for  each  of  these  years  in  order  to  ascer- 
tain whether  any  part  of  the  income  so  aj^rtioned  is  actually  to  be 
taxed,  after  allowing  for  the  exemptions  and  deductions  to  which  the 
taxpayer  would  be  entitled. 

4.  The  deductions  from  gross  income  for  the  purpose  of  determin- 
ing taxable  net  income  follow  in  general  those  of  the  federal  law,  with 
such  changes  as  would  naturally  be  involved  in  avoiding  the  taxation  of 
federal  agencies.  In  the  determination  of  losses  we  have  provided  spe- 
cifically for  the  deduction  of  losses  shown  by  the  inventory,  in  case  an 
inventory  is  kept,  as  a  counterpart  to  the  plan  of  taxing  gains  if  such 
are  shown  by  the  inventory.  It  is  clear,  of  course,  that  a  consistent 
policy  must  be  followed  by  the  taxpayer,  who  must  submit  to  taxation  on 
such  gains  as  are  shown  by  the  invent^  if  he  expects  to  take  advantage 
of  losses  disclosed  in  the  same  manner. 

The  proposal  for  the  deduction  of  interest  on  debts  (section  5773- 
8(2),  was  suggested  by  the  Plan  for  a  Model  System  of  State  and  Local 
Taxation.  The  object  here  is  to  limit  the  deduction  of  interest  to  such 
proportion  of  total  interest  payable  as  the  total  taxable  income  bears  to 
the  total  income  from  all  sources.  A  taxpayer's  income  might  include 
a  large  amount  of  exempt  income,  sueh  as  the  interest  on  United  States 
bonds,  and  his  own  interest  deduction  should  be  Hmited  to  that  pro  rata 
part  which  his  taxable  income  bears  to  his  total  income. 

The  specific  exemptions  to  individuals  have  been  set  at  $500  for  un- 
married persons  and  $1,000  to  married  persons,  with  $aoo  additional 
for  each  dependent.  We  recognize  that  these  figures  mean  an  encroach- 
ment iipon  that  subsistence  mininram  which  all  authorities  agree  should 
be  exempted,  but  we  have  ventured  thus  far  because  of  our  desire  to 
secure  as  wide  a  diffusion  of  the  burden  of  the  income  tax  as  possible, 
and  also  because  of  the  need  of  additional  revenue  from  the  tax.  In 
section  5773-8(9)  we  have  followed  the  policy  already  estabhshed  in 
the  inheritance  tax  in  restricting  the  exempted  contributions  to  those 


given  to  such  religious,  educational,  charitable  and  similar  classes  of 
institiitioiis  as  are  conducting  a  substantial  part  of  their  activities  in 
this  state. 

5.  Inasmuch  as  residence  within  the  state  ss  made  the  test  of  tax 
liabihty,  fiduciaries  are  required  to  report  and  pay  tax  only  upon  such 
part  of  the  incom?  of  trust  estates  as  is  paid  to  persons  residing  within 
the  state.  Partnership  incomes  as  such  are  not  taxed  but  the  partner- 
ship may  be  required  to  make  a  return  of  income  as  a  source  of  informa- 
tion regarding  the  income  of  the  dividual  partners. 

6.  The  question  has  sometimes  been  raised  as  to  the  advisability 
of  simjjy  requiring  taxpayers  to  file  a  copy  of  their  federal  returns, 
upon  which  the  state  income  tax  might  be  applied.  We  have  considered 
the  possibility  of  this  course  but  have  decided  against  it  on  the  followii^ 
grounds: 

First,  the  conflict  of  tax  jurisdictions.  The  federal  government  ex- 
empts various  inci»nes  derived  from  the  state,  such  as  interest  on  state 
bwids  and  the  salaries  of  state  officials  and  employees.  A  state  need  not 
do  this  and  our  proposed  income  tax  law  does  not.  On  the  other  hand* 
a  state  law  must  exempt  entirely  all  federal  agencies,  even  those  which 
are  not  entirely  exaiqited  by  the  federal  law,  such  as  interest  on  the  pub- 
lic debt  and  the  salaries  of  federal  oflicials. 

Second,  there  are  some  other  differences  in  the  determination  of 
gross  and  net  income  under  the  two  laws.  The  federal  personal  income 
tax  law  is  co-ordinated  with  a  corporation  tax,  and  dividends  are  ex- 
empted from  the  normal  tax.  The  prq)osed  law  for  Ohio  does  not  ex- 
empt dividends  received  by  the  individual.  In  the  same  way  the  federal 
law  would  permit  a  deduction  of  the  state  income  tax,  but  this  is  not 
allowaUe  under  our  bill.  Our  provision  for  the  deduction  of  interest 
on  indebtedness  and  of  losses  differ  from  those  in  the  federal  law.  These 
and  other  possible  points  of  difference  would  really  necessitate  a  sq>arate 
return,  or  at  least  a  supplementary  return  whereby  the  proper  correction 
could  be  made  in  the  first  return,  so  that  little  would  he  gained  by  the 
effort  to  rely  on  duplicate  returns. 

Finally,  it  is  very  much  more  desirable  from  the  administravtive 
standpoint,  to  have  a  separate  return  made  to  the  state.  We  have  been 
strongly  advised  against  the  plan  of  duplicate  returns  by  the  tax  com- 
missioner of  Connecticut,  whose  experience  with  the  other  system  in  the 
taxation  is  to  follow  up  and  check  the  indefinite  number  of  corrected 
and  amended  and  supplementary  returns  which  are  being  made.  While 
tlic  Coonecticut  plan  has  involved  the  taxation  of  corporations  rather 


77 

than  individuals,  we  preferred  not  to  take  the  chance  of  similar  dif- 
ficulties with  the  individual  return.  Further,  our  system  of  assessment 
and  collection  makes  it  necessary  for  state  and  local  officials  to  have 
oompiidbt  ccmtnd  of  the  returns,  and  to  give  to  these  officials  the  com- 
plete authority  to  decide  whether  or  not  a  return  should  be  made  and  a 
tax  paid  by  any  person. 

The  administration  of  the  income  tax  reqtiires  the  establishment 
of  a  fairly  com{^ete  organization,  connected  with,  and  yet  supplementary 
to  the  existing  administrative  organization.  The  state  tax  commission 
is  placed  in  general  charge  of  the  income  tax  and  in  order  to  enable  this 
body  to  carry  the  additional  burden  we  have  added  a  fourth  member 
to  that  body  (section  1465-1).  This  presents  the  additional  advantage 
of  making  the  tax  icommission  a  bi-partisan  administrative  board. 

The  county  auditor  is  made  local  assessor  of  incomes,  ex-officio, 
and  is  required,  insofar  as  this  act  is  concerned,  to  obey  the  orders  and 
instructions  of  the  tax  commission  and  to  make  such  reports  to  it  as 
the  commission  may  direct.  He  shall  appoint  such  deputies  and  other 
assistance  as  the  commission  may  authorize  and  at  rates  of  compensa- 
tion estabHshed  by  the  latter.  Returns  are  to  be  made  by  taxpayers 
to  the  auditor  of  their  respective  counties  of  residence.  Fiduciaries  are 
to  make  returns  in  the.  counties  in  which  the  beneficiaries  reside,  or  if 
the  estate  is  held  for  contingent  beneficiaries  or  for  lutme  distribution, 
in  the  county  of  residence  of  the  fiduciary. 

The  county  auditor  shall  make  the  assessment  of  income  tax  and 
certify  a  duplicate  to  the  county  treasurer,  by  whom  the  tax  is  to  be 
cdlected  at  the' same  time  amd  in  the  same  manner  as  other  taxes,  except 
that  the  whole  amount  shall  be  collected  at  one  time,  which  will  naturally 
be  the  next-  date  for  tax  payment  after  the  return  has  been  filed  and 
the  income  tax  assessed.  This  date  will  depend,  therefore,  upon  the 
date  on  which  the  taxpayer's  fiscal  year  closes.  For  the  convenience 
of  those  yho  have  become  accustomed  to  the  federal  methods,  it  is 
provided  that  any  taxpayer  may  pay  his  tax  at  the  time  of  making  his 
return,  subject  to  subsequent  correction  and  final  determination  of  the 
tax  due  by  the  county  auditor. 

Appeals  from  the  assessment  as  made  by  the  auditor  are  to  be  taken 
to  the  common  pleas  court  of  the  county  wherein  the  collection  is  to 
be  made.    These  cases  are  to  be  given  precedence  on  the  docket  and 

heard  promptly,  and  in  the  meantime  the  tax  appealed  from  shall  not  be 
collected.   A  condition  precedent  to  the  appeal  is  a  bond  given  to  the 


78 


county  auditor  by  the  taxpayer  for  the  performaiicc  of  the  decree  and 
the  payment  of  costs. 

The  tax  commission  may  acquire  information  at  the  source  by  re- 
quiring appropriate  reports  from  all  companies  which  now  make  rq>orts 
to  the  commission,  and  also  by  requiring  similar  information  from  aU 
other  persons,  firms  or  corporations  which  now  report  to  any  other  state 
officer.  The  commission  shall  furnish  the  blanks  and  forms  suitable  for 
the  collection  of  the  information  required  and  the  other  state  officers 
are  required  to  assist  in  collecting  and  forwarding  this  information  to 
the  commission.  Suitable  provision  is  made  for  securing  secrecy  of  the 
returns,  and  a  penalty  of  not  to  exceed  $i,ooo  fine  and  one  year  impris- 
onmrat,  or  both,  with  forfeiture  of  public  office  or  employment,  may 
be  imposed  upon  any  officials  or  employes  who  violate  these  provisions. 

Contracts  or  covenants  to  assume  the  tax  are  made  void,  because  the 
object  of  this  law  is  to  tax  each  individual  on  his  taxable  personal  in- 
conie,  and  the  tax  assumption  covenant  defeats  this  purpose  by  intro- 
ikiGing  exempti(Mis  for  the  individual  which  are  not  compatible  with  this 
purpose. 

We  have  made  some  effort  to  estimate  the  yield  which  might  be  ex- 
pected from  such  a  tax  cm  incomes  as  we  have  here  proposed.  The  yield 
of  the  income  tax  depends,  of  course,  upon  the  rate  and  the  volume  of 
taxaUe  net  income  that  will  be  returned  by  residents  of  the  state.  It  is 
inqxis^Me  to  ascertain  the  latter,  and  we  have  been  compelled  to  rely 
upon  estimates  based  on  the  returns  made  under  the  federal  income  tax 
law  by  residents  of  the  state.  The  latest  material  available  on  this  point 
is  found  in  the  Statistics  of  Income  compiled  from  the  Income  Tax  Re- 
turns for  the  calendar  year  1917.  In  this  report  no  analysis  was  made  of 
the  incomes  between  $1000  and  $2000,  and  we  are  therefore  comf^etdy 
in  the  dark  as  to  the  amount  of  revenue  which  may  be  expected  from  the 
taxable  incomes  below  $2000.  Our  estimate  of  the  yield  of  the  tax  on 
incomes  above  $2000  is  presented  herewith. 

(1)  Total  income  returned  for  calendar  year  1917   $596,090  92^ 

(2)  Personal  Exemptions   $194,019,000 

(3)  Contribtitions    13,745,314 

(4)  Federal  Income  and  Excess  Profit  Taxes   30,989,654  258,753,968 


(5)  Total  Taxable  Net  Income   1359  335  954 

(6)  Taxable  Net  Income,  $2,000  to  14,000.....:....  $53,130,854 
Tax  at  1%   $531,308  54 

(T)   Taxable  Net  Iiicx>me,  $4,000  and  over   306,206,100 

Tax  at  2%  $6,124,122  00 

Total  Taxes   6,655,430  54 


79 

For  the  sake  of  completing  our  estimate,  let  us  assume  that  the  num- 
ber of  returns  of  taxable  inccmie  between  $500  and  $2000  will  be  equal 
to  the  number  of  returns  of  $2000  and  over.    (In  1917  the  number  of 

returns  between  $1000  and  $2000  was  47.25%  of  the  total.)  Let  us 
assume  further  that  the  total  net  income  returned  in  such  groups  is  one- 
fifth  of  the  amount  returned  in  the  other  classes  (in  1917  this  ratio  was 
18.04%).  This  would- mean  that  95,396  taxpayers  would  return  $119,- 
618,184,  or  an  average  annual  income  of  $1253.  On  the  further  assuntp- 
tion  that  the  ratio  of  taxable  to  total  net  income  between  $500  and  $2000 
would  be  the  same  as  between  2000  and  4000,  the  taxable  net  income 
would  be  30.25%  of  $119,618,184,  or  $36,184,500,  and  the  tax  on  ^is 
amount  at  1%  would  be  361,845.  The  total  tax  on  this  basis  would  be 
$7,017,275. 

We  realize  that  calculations  of  this  sort  are  only  roughly  approxi- 
mative, in  view  of  the  many  factors  which  cannot  be  accurately  con- 
sidered by  reason  of  the  meager  data  available.  We  indulge  in  specu- 
lations of  this  sort  for  the  purpose  of  providing  ourselves  with  some 
basis,  however  insubstantial  it  may  be,  upon  which  to  adapt  the  income 
tax  into  our  general  estimate  of  the  relief  to  be  obtained  from  the  new 
taxes  as  proposed.  We  migrht  say  that  the  Ohio  income  tax  law  as  we 
have  drafted  it  may  be  expected  to  yield  between  $7,000,000  and 
$8,000,000,  and  in  our  summary  to  Qiapter  III  we  have  used  the  lattee 
figure,  althoug-h  we  realize  that  it  is  doubtless  too  hi^h. 

We  have  proposed  to  divide  the  yield  of  the  income  tax  between 
the  state  and  the  local  subdivisions  entitled  to  share  therein,  namely  the 
municipal  coroorations  and  townships,  In  the  ratios  of  %  and  Ya,  re- 
spectively. This  would  give  the  state  about  $2,000,000  00  and  the  local 
units,  about  $6,000,000.00  on  the  assumption  of  an  $8,000,000.00  yield 
We  have  found  that  the  probable  shortage  of  state  revenues  will  be  be- 
tween $1,000,000.00  and  $4,000,000.00  and  this  proportion  brings  the 
state  revenues  fairly  well  into  balance  with  expenditures  for  the  present 
Hennium.  Of  the  portion  distributable  locally  the  cities  will  receive  by 
far  the  larger  share,  for  the  income  tax  is  everywhere  characteristically 
an  urban  tax.  About  37%  of  the  federal  income  tax  of  1918  was  paid 
from  New  York  State,  according  to  Professor  Seligman  of  Columbia 
University,  and  of  this  amount  87%  was  paid  from  New  York  City. 
Milwaukee  County,  Wisconsin,  with  18.86%  of  the  population  of  the 
state,  was  assessed  for  44«oi%  of  the  total  income  tax  in  1916.  We  may 
expect  a  similar  distribution  of  taxable  net  income  and  income  tax  yield 
in  Ohio,  which  means  that  the  cities  will  actually  obtain  some  relief  by 


Bo 

securing  by  far  the  lai^r  share  of  the  75%  allotted  locally,  although,  as 
we  have  shown  above,  this  relief  will  be  insufficient  for  1920. 

S^ned: 

Frank  C.  Pareett,  Chairman, 
WlIXIAM  Agnew, 

Wallace  W.  Bellew, 
John  E.  Holoen, 
Frank  E.  Whittemore, 
Rupert  R.  Beetham, 

R.  M.  BiLLINGSLEA, 

Milton  Clark, 
Edward  J.  Hopple, 
Huston  T.  Robins, 
Francis  M.  Thompson.  ' 


On  account  of  illness  Senator  Hiomas  M.  Berry  has  not  been 
able  to  attend  the  sessions  of  the  committee,  nor  to  sign  the  report. 


APPENDIX 

TO  THE 

Report  of  the  Special  Joint 
Taxation  Committee 

r 

OF  THE 

»  ■ 

83rd  Ohio  General  Assembly 


A  REPORT 


ON  THE 

OPERATION  OF 
STATE  INCOME  TAXES 


BY 

H ARLEY  L.  LUTZ,  Ph.  D. 

PROFESSOR  OF  ECONOMICS  IN  OBERUN  COU^GE 


Presented  to  the  Special  Joint 

Taxation  Committee 

September  18,  1919 


LETTER  OF  TRANSMITTAL. 


To  Senator  Frank  C.  Parrett, 

Chmrman  of  the  Special  Joint  Taxation  Committee,  Columbus,  Ohio. 

Dear  Senator  Parrett  : — 

I  take  pleasure  in  presenting  herewith  my  report  on  the  operation 
of  Stote  IncfMne  Taxes. 

Respectfully  sulwnitted, 

Hasley  L.  Lutz. 

September  i8,  1919. 


When  Professor  Seligman  published  the  first  edition  of  his  extensive 
work  on  Income  Taxation,  in  191 1,  he  concluded  an  exhaustive  survey 
of  the  methods  and  results  of  state  income  taxation  with  the  generaliza- 
tion that  the  income  tax  should  be  administered  by  the  federal  govem- 
•ment.^  He  was  forced  to  this  conclusion  by  a  consideration  first,  of  the 
-experience  of  the  American  states  in  their  efforts  at  income  taxation 
during  the  19th  century,  and  also,  because  of  the  increasing  importance 
of  interstate  transactions  with  the  resultant  difficulty  of  dividing  or 
allocating  such  incomes  to  tlie  several  states.  The  second  of  these  con- 
siderations still  remains,  and  will  doubtiess  always  constitute  a  very 
real  difficulty  to  the  equitable  operation  of  a  state  tax  upon  incomes. 
The  first  ground  of  objection  has  been  so  successfully  met,  however, 
during  the  past  eight  years  by  at  least  two  states  that  we  may  now  rea- 
sonably enough  postulate  that  a  new  era  of  income  taxation  has  been 
reached.  That  is,  we  have  not  solved,  and  we  probably  shall  never  solve 
satisfactorily  all  of  the  problems  of  interstate  apportionment,  although 
some  progress  has  been  made  in  this  direction;  but  we  do  know  how  to 
overcome  the  other  difficulties  which  proved  so  serious  in  the  earlier 
experiments.  These  difficulties  were  administrative  defects,  and  they 
led  to  general  and  complete  failure.  The  following  summary  of  the 
causes  of  this  deficiency  by  a  careful  student  of  the  earlier  state  income 
taxes  may  serve  as  a  kind  of  historical  guide  post:  ^ 

"A  careful  study  of  the  history  of  the  tax  lea^s  one  to  the  conclusion  that  the 
failure  has  been  due  to  the  administration  of  the  laws.  This  conclusion  is  borne  out 
by  both  the  admissions  of  the  advocates  and  the  assertions  of  the  opponents  of  the 
tax,  and  is  corroborated  by  the  reports  of  tax  commissions.  The  causes  operating 
to  produce  this  failure  in  administration  appear  to  have  been  four ;  the  laws  them- 
selves have  been  defective  m  the  provisions  for  their  own  administration;  the 
officials  have  been  lax  in  the  enforcement  of  the  laws;  the  taxpayers  have  been 
persistent  in  evading  them;  and  the  nature  of  some  incomes  has  made  them 
especially  difficult  to  reach.  The  income  tax  thus  far,  failing  to  recognize  the 
weakness  of  Ae  average  taxpayer,  have  allowed  him  to  return  his  own  income. 
Some  argue  that  to  employ  any  other  method  would  be  undemocratic  and  that 
pid>lic  sentiment  would  never  submit  to  it  However,  although  die  public  has 
always  opposed  any  inquisitorial  system,  the  opposition  has  been  often  due  rather 
to  the  fear  that  it  may  attain  die  end  sought  than  that  it  is  counter  to  the  ^irit 

*  Seligman,  The  Income  Tax,  1911,  pp.  418-429;  654-655. 

•Kinsman,  The  Income  Tax  In  the  Commonwealths  of  the  United  States, 
Pub.  Amer.  Econ.  Assn.,  1903,  p.  117. 


97 


88 


of  democracy.  *  ♦  ♦  We  have  yet  to  learn  of  a  plausible  argument  in  sup- 
port of  the  assertion  that  the  income  tax  is  more  inquisitorial  than  other  forms 
of  direct  taxation.  The  income  tax  has  succeeded  in  nations  quite  as  democratic 
as  Ac  United  States.  Other  methods  than  self-assessment  have  been  employed 
successfully,  both  by  foreign  nations  and  to  a  limited  extent  by  some  of  our  own 
states:*' 

The  first  of  the  modem  state  income  tax  laws  was  passed  by  the 

legislature  of  Wisconsin  in  1911.  In  this  state  the  movement  for  an  in- 
come tax  received  its  first  imi)etus  in  the  very  general  dissatisfaction 
which  had  been  aroused  by  the  inequitable  operation  of  the  property 
tax  as  applied  to  personal  property.  A  constitutional  amendment  au- 
thorizing an  inccHne  tax  was  adopted  in  1908  by  a  large  majority.*  A 
tentative  measure  was  introduced  in  1909  and  adopted  in  191 1.  From 
the  very  outset  the  success  of  this  measure  was  in  such  marked  con- 
trast with  the  earlier  state  experiences  that  a  number  of  states  have 
since  resorted  to  this  form  of  taxation,  though  not  all  of  them  have  seen 
fit  to  follow  the  Wisconsin  law  in  its  most  distinctive  features,  that  is, 
its  administrative  methods  which,  mpre  than  anything  else  have  made 
it  successful. 

The  state  income  tax  laws  adopted  since  1911  have  been  the  follow- 
ing, which  is  a  complete  list  so  far  as  the  writer  can  discover;  West 
Virginia,  Oklahoma,  Connecticut,  191 5;  Massachusetts,  1916;  Missouri, 
Delaware. and  Mcmtana,  191 7;  New  York,  1917  and  1919.  Income 
t9xes  of  older  sort  are  still  in  force  in  Virginia,  North  Carolina  and 
Tennessee. 

The  income  tax  laws  of  the  past  eight  years  may  be  grouped  into 
two  classes,  on  the  basis  of  their  scope.  In  one  group  are  those  laws 
which  apply  to  incomes  of  every  sort,  as  in  Wisconsin  and  New  York. 
The  former  state  has  one  general  income  tax  law,  the  latter  has  enacted, 
separate  acts  for  the  taxatioa  of  individual  and  corporate  incomes.  The 
odier  group,  comprising  all  other  states  having  income  tax  laws,  have 
applied  these  laws  to  a  limited  class  of  incomes.  In  Massachusetts, 
Oklahoma,  Delaware  and  Missouri,  the  tax  is  levied  on  the  income  of 
individuals  only,  and  in  Massachusetts  the  scope  of  the  law  is  further 
confined  to.  certain  classes  of  individual  income.  West  Virginia,  Con- 
necticut and  Montana  levy  the  tax  upon  corpora,te  incomes  oaly.  There 
is,  thus,  a  considerable  variety  in  the  form  of  the  state  incitoie  tax  laws,  in 

*  The  Wisconsin  constitution  now  contains  the  following  tax  provisions :  "The 
rates  of  taxation  shall  be  uniform  and  taxes  shall  be  levied  upon  such  property  as 
•  the  legislature  shall  prescribe.   Taxes  may  also  be  imposed  upon  incomes,  priv- 
ileges and  occupations,  which  taxes  may  be  graduated  and  progressive,  and  reas<m- 
aible  iexemptions  may  be  provided".  Art  I,  Sec.  8. 


89 


part  due  to  the  differing  local  conditions  which  gave  rise  to  the  several 
tax  laws,  in  part  due  to  the  need  of  adaptation  to  the  other  features 
of  the  local  tax  system,  and  in  part  perhaps  due  to  an  inevitable  tendency 
among  the  states  toward  heterogeneous  and  even  conflicting  methods  of 
legislation  upon  the  same  subject. 

The  National  Tax  Association's  Report  on  a  Model  System  of 
State  and  Local  Taxation  has  given  ample  recognition  to  these  varying 
local  conditions  and  in  our  interpretation  and  comparison  of  the  various 
state  laws  we  need  to  bear  this  in  mind.  It  does  not  follow  that  the  plan 
adopted  in  each  state  was  the  one  best  adapted  to  the  local  long  run 
needs,  for  in  some  states  there  are  very  definite  tendencies  toward  modi- 
^ficaticMi,  chiefly  in  the  direction  of  a  broader  scope  of  the  tax.  This 
committee  will  doubtless  be  in  a  position  to  decide  upon  the  general  type 
of  income  tax  law  which  will  best  suit  Ohio's  needs.  It  is  hardly  neces- 
sary to  ui^e  that  insofar  as  Ohio  is  able  to  promote  uniformity  in  state 
legislation  by  observing  the  recommendations  of  the  model  system,  it 
would  be  of  the  greatest  advantage  for  this  and  for  other  states. 

The  plan  of  this  report  will  be  first  to  describe  each  of  the  more 
important  state  income  tax  laws  and  to  indicate  in  each  case  some  of 
the  conditions  which  had  to  be  met  and  the  results  which  have  been  at- 
tained ;  and  then  to  develop  some  general  considerations  which  may  be 
drawn  from  the  study  as  a  whole.  Detailed  consideration  will  be  given 
only  to  the  laws  of  the  four  states  visited,  and  for  convenience  the 
discussion  will  follow  the  order  of  the  field  trip. 

Massadiiisetts. 

The  foundation  for  the  Massachusetts Jncome  tax  law  was  laid  by 
a  constitutional  amendment  which  was  adopted  in  1915.  The  text  of 
this  amendment  is  as  follows: 

"Full  power  and  authority  are  hereby  granted  to  the  General  Court  to  im- 
pose and  levy  a  tax  on  incomes  in  the  manner  hereinafter  provided.  Such  a  tax 
may  be  at  different  rates  upon  income  derived  from  different  classes  of  property, 
but  shall  be  levied  at  a  uniform  rate  throughout  the  Commonwealth  upon  incomes 
derived  from  the  same  class  of  property.  The  General  Court  may  tax  income 
not  derived  from  property  at  a  lower  rate  than  income  derived  from  property, 
and  may  grant  reasonable  exemptions  and  abatements.  Any  class  of  property  the 
income  from  which  is  taxed  under  the  provisions  of  this  article  may  be  exempted 
^  from  the  imposition  and  levying  of  proportional  and  reasonable  assessments,  rates 
and  taxes  as  at  present  authorized  by  the  constitution.  This  article  shall  not  be 
construed  to  limit  the  power  of  the  General  Court  to  impose  and  levy  reasonable 
duties  and  excises". 
* 

The  conditions  which  gave  rise  to  the  income  tax  in  Massachus^ts 
weie  in  general  similai*  to  those  which  had  led  the  people  of  Wisconsin 


90 

to  take  sach  a  step.  In  a  W6fd,  it  was  the  utter  breakdown  of  the 
property  tax  when  appHed  to  personal  property.  The  specific  evils  which 
finally  created  an  intolerable  situation  in  Massachusetts  were: 

(1)  The  concentration  of  property  into  a  small  number  of  favored 

towns  where  tax  rates  were  low  and  assessors  extended  a 
cordial  welcome  to  wealthy  immigrants. 

(2)  The  creation  of  an  artificial  demand  for  tax  free  securities, 

such  as  the  shares  of  Massachusetts  corporatiotis,  to  the 
detriment  of  the  whole  investment  market. 
(5)    The  migration  of  property  fnwi  the  state. 

These  evils  were  discussed  by  the  Joint  Legislative  Committee  of 
1915,  which  recommended  the  income  tax  law,  in  the  following  lan- 
guage: 

"In  addition,  in  answer  to  inquiries,  the  Commission  received  replies  from 

assessors,  confirming  the  general  impression  that  where  an  attempt  is  made  to  en- 
force taxation  at  a  high  rate  on  intangibles,  the  result  is  that  owners  of  such 
property  either  change  its  form  to  non-taxables  or  remove  their  residence  to  some 
other  city  or  town  having  a  low  rate  or  where  the  law  is  not  so  strictly  enforced,, 
or  to  some  other  state  having  tax  laws  favorable  to  the  owners  of  intangibles. 
Among  the  places  mentioned  to  which  removals  had  been  made  were  Orleans, 
Dover,  New  York,  Rhode  Island,  Connecticut,  New  Hampshire,  Maine,  Florida, 
and  California,  alod  in  many  cases  the  names  of  the  persons  who  removed  for 
tills  reason  including  some  well-known  citizens,  were  given:" 

These  consideraticms  and  other  elements  in  the  local  situation  gave 
preference  in  Massachusetts  to  a  tax  upon  the  income  from  certain 
intangibles,  and  upon  certain  classes  of  earned  incomes.     The  Massa- 
chusetts act,  accordingly,  subjects  to  taxation  income  of  the  following, 
classes,  and  at  rates  indicated  in  each  case: 

I .    Income  to  be  taxed  at  6% : 

(l)    The  interest  from  bonds,  notes,  moneys  at  interest,  and 
all  debts  due  the  person  to  be  taxed,  except : 

(a)  Deposits  in  any  Massachusetts  savings  bank  or  sav- 
ings department  of  a  trust  compemy,  to  the  limit  al- 
lowed by  law; 

(b)  U.  S.  bonds  and  such  state  and  local  bonds  as  are 
now  exempt  from  taxation; 

(c)  Loans  secured  exclusively  by  mortgages  on  real 
estate  if  situated  within  the  state,  to  the  amount  not 
exceeding  the  assessed  value  of  the  real  estate. 

(1)  Constitution  of  Massachusetts,  Amendment  44. 

(2)  Bullock,  The  Income  Tax,  published  by  Old  Colony  Trust  Co.,  1916. 

(3)  Report  of  the  Special  Committee  on  Taxation,  1916,  pp.  38-39. 


91 


If  the  total  taxable  income  from  the  above  sources  does  not  exceed 
$6oo,  an  exemption  of  $300  is  allowed,  provided  that  in  the  case  of  a 
married  person,  the  exemption  is  not  allowed  if  the  comlnned  income 
irom  all  sources  is  in  excess  of  $1,200. 

2.  Income  taxed  at  3%. 

Excess  of  gains  over  losses  received  from  dealings  in  intan- 
gibles, whether  the  taxpayer  is  engaged  in  the  business  of 
dealing  in  such  property  or  not.  No  exemption. 

3.  Income  taxed  at  : 

(a)  Income  from  annuities.  If  the  total  income  from  all 
sources  does  not  exceed  $600,  an  ^emption  or  $300  is 
allowed,  but  only  one  such  exemption  may  be  claimed. 

(b)  Incomes  from  professions,  employments,  trade  or  busi- 
ness, in  excess  of  an  exemption  of  $2,000. 

In  order  to  meet  a  situation  arising  from  the  decisions  of  the  Massa- 
chusetts courts,  the  following  paragraph  was  added  to  section  2,  relating 
to  the  tax  on  the  income  from  intangibles: 

Tor  the  purpose  of  this  act  any  securities  of  the  classes  designated  in  this 
section,  held  in  pledge,  or  on  margin  or  otherwise,  by  an  agent  or  broker  as 
security  for  a  debt  of  his  principal,  whether  such  securities  stand  in  the  name 
of  the  principal  or  any  other  person,  shall  be  deemed  to  be  the  property  of  the 
principal,  and  the  income  arising  therefrom  shall  be  included  in  the  total  income 
of  the  princtpai  under  this  sedioa," 

In  the  decisions  referred  to  the  court  had  held  that  for  purposes  of 
taxation  such  securities  were  the  property  of  the  agents,  and  the  Joint 
Committee  recognized  that  inasmuch  as  the  ^ncipal  was  the  real  party 
at  interest  the  income  tax  should  be  imposed  upon  him. 

A  further  question  is  still  unsettled  in  the  federal  courts  and  for 
the  time  being  was  disposed  of  in  the  following  terms : 

"No  distribution  of  capital,  whether  in  liquidation  or  otherwise,  shall  be 
taxable  as  income  under  this  section;  but  accumulated  profits  shall  not  be  re- 
garded as  capital  under  this  section". 

One  of  the  few  cases  in  which  the  law  has  been  taken  to  the  courts 
involved  this  point,  and  the  court  sustained  this  passage  as  applying  to 
stock  dividends  and  to  subscription  rights,  and  upheld  the  constitution- 
ality of  a  tax  so  imposed.  ^ 

The  double  taxation  argument  was  successfully  invoked  at  the  time 
to  prevent  the  extension  of  the  income  tax  to  all  personal  incomes  of 


^  Tax  Commissioner  v.  Putnam,  227  Mass,  522. 


92 


whatever  sort.  This  recognized  defect  is  now  under  consideration  and 
both  administrative  officials  and  legislative  leaders  are  looking  forward 
to  the  improvement  of  their  income  tax  in  this  particular.  Under  ^ 
spdl  of  the  same  argument  complete  exemption  was  extended  to  all 
property  the  income  of  which  is  taxable  under  section  2,  that  is,  intan- 
gibles. '  In  its  extreme  form  the  double  taxation  argument,  thus  ap- 
plied, is  not  sound  in  principle,  and  there  need  be  no  hesitation  in  treat- 
ing the  income  from  real  estate  and  tangible  personal  property  as  sepa- 
rate objects  of  taxation  from  the  visible  properties  themselves.  In  the 
case  of  intangiUes  the  point  has  more  weight  because  of  the  purdy  repre- 
sentative character  of  this  form  of  property.  Excessive  double  taxa- 
tion of  intangibles  has  been  universal  under  the  general  property  tax, 
and  the  Ohio  practice  has  been  no  exception.  It  appears  to  be  rather 
important,  therefore,  that  the  legislature  be  given  power  to  classify  or 
exempt  such  property. 

The  tax  on  business  incomes  was  a  re-enactmient  of  an  in- 
ccMnc  or  "faculty"  tax  which  had  been  m  use  since  the  colonial  period. 
The  new  act  had  the  merit  of  substituting  a  definite  and  practicable  plan 
of  incmne  taxation  for  the  indefinite  and  inadequate  provisions  on  this 
subject  which  had  occupied  the  Massachusetts  statute  books  for  over  a 
century.   This  section  is  summarized  thus  by  the  Joint  Committee :  * 

Taxable  income  is  defined  to  include  the  gross  income  from  the  profession, 
employment,  trade  or  business,  including  profits  from  the  sale  of  capital  assets  em- 
ployed therein,  less  ^  following  deductions:  a)  expenses  incurred;  b)  a  reason- 
able allowance  for  depreciation  and  obsolescence  of  property  employed  in  the 
trade  or  business;  c)  taxes  paid  within  the  year;  d)  interest  paid  upon  indebted- 
ness incurred  in  connection  with  the  trade  or  business ;  e)  losses  from  the  sale  of 
a^tal  assets  or  losses  sustamed  by  fire  theft,  etc;  f)  bad  debts  incurred  in  the 
trade  or  business,  and  actually  charged  off  during  the  year;  g)  an  amount  equal 
to  5%  of  the  assessed  value  of  the  tangible  property  employed;  and  h)  the  sum  of 
$500  for  a  husband  or  wife  with  whom  the  party  lives,  and  |250  for  each  ditld 
under  18  years  of  age,  or  parrat  actually  dependent,  but  not  to  exceed  in  all  ft^OOO." 

Most  of  these  deductions  are  of  the  kind  ordinarily  allowed  by  in- 
come tax  laws.  The  influence  of  the  double  taxation  sentiment  is  seen  in 
the -deduction  (g),  and  at  the  time  that  this  objection  can  be  overcome, 
it  is  anticipated  that  such  a  provision  will  be  removed,  in  favor  of  a  low 
tax  on  tangible  property,  in  line  with  the  proposal  of  the  National  Tax 
Association  Committee  on  a  Model  System. 

Subsequent  sections  of  the  act  authorize  the  use  of  such  fiscal  year 
and  such  method  of  accounting,  cash  or' accrual,  as  are  ni^  convenient 
to  the  taxpayer.  The  income  of  the  estates  of  deceased  persons  is  taxed 


*  Report  of  the  Special  Commission  on  Taxation  1916,  p.  50. 


93 


to  their  estates,  and  the  administrator  or  executor  is  made  liaUe  for  the 
taxes  assessed.  In  the  case  of  property  held  in  trust,  the  principle  was 
introduced  of  making  the  domicile  of  the  beneficiary  the  test  of  deter- 
mining liability  to  taxation.  An  inhabitant  of  Massachusetts  is  required 
to  return  income  received  from  non-resident  fiduciaries,  and  all  citizens 
of  Massachusetts  who  may  be  acting  in  such  a  capacity  are  required  to 
pay  the  tax  on  account  of  income  paid  to  residents  of  the  state.  For 
administrative  convenience  in  such  cases  the  tax  is  assessed  to  tiie  fidu- 
ciary. 

The  profits  or  income  of  the- classes  made  taxable  by  the  act,  of 
partnerships,  of  which  any  member  is  a  resident  of  the  state,  are  sub- 
ject to  taxation.  If  any  member  is  not  a  resident,  a  deduction  corre- 
sponding to  the  relation  of  the  aggregate  interests  of  non-resident  mem- 
bers to  the  whole  assets  is  allowed.  The  tax  is  assessed  to  the  partner- 
ship as  such  and  the  members  are  individually  exempt  on  such  income. 

The  sections  providing  for  returns  by  those  liable  to  taxation  under 
the  act,  and  for  penalties  in  case  of  failure  to  file,  or  delay  in  filing  re- 
turns, are  comprehensive  and  adequate.  The  return  of  income  for  the 
previous  calendar  year  must  be  filed  on  or  before  March  i,  and  for  each 
unauthorized  day  of  delay,  a  penalty  of  $5.00  is  imposed.  Fraudulent 
returns  and  refusal  to  correct  an  incorrect  or  incomplete  return  after 
notice  from  the  tax  commissioner,  are  punished  by  a  fine  of  $ioo-$io,ooo, 
or  imprisonment  for  not  more  than  one  year,  or  both,  and  forfeiture  of 
the  right  to  hold  public  office  in  the  state  for  five  years. 

The  provisions  for  administration  are  among  the  most  important  in 
the  entire  act,  for  the  success  of  the  tax  in  Massachusetts  as  in  Wisconsin, 
has  been  very  largely  due  to  the  new  method  and  principle  of  adminis- 
tration which  has  been  introduced.  The  essential  feature  of  the  admin- 
istrative provisions  is  their  centralization.  The  whole  adnunistration  of 
the  law  is  placed  in  the  hands  of  the  state  tax  commissioner,  and  the 
active  -direction  of  the  work  is  delegated  to  an  income  tax  deputy  who 
is  chosen  by  the  tax  commissioner  with  the  advice  and  consent  of  the 
governor  and  council.  The  tax  commissioner  is  also  required  to  divide 
the  state  into  tax  districts,  and  with  the  advice  and  consent  of  the  gov- 
ernor and  cotmcil  he  shall  appoint  an  income  tax  assessor  for  each  dis- 
trict. He  may  change  the  limits  of  the  districts  and  transfer  assessors 
from  one  district  to  another.  Preference  is  to  be  given  in  these  appoint- 
ments to  residents  of  the  districts.  The  tax  commissioner  may  also  ap- 
point deputy  income  tax  assessors,  who  may  be  members  of  boards  of 
assessors  of  cities  or  towns.  Concerning  the  basis  of  selecting  these 
various  assistants,  the  income  tax  deputy  writes  as  follows :  ^ 

*  Personal  Letter  from  the  Income  Tax  Deputy,  September  1,  1919. 


94 


"I  am  glad  to  say  that  partizanship  has  not  figured  very  materially  in  the 
majority  of  cases.  The  appointments  are  made  by  the  Tax  Commissioner  and 
must  be  approved  by  the  Governor  and  Council.  In  general  this  approval  has  been 
pretty  freely  granted  without  very  much  political  pressure.  We  try  to  select  men 
•who  have  had  both  a  broad  acquaintance  with  people  in  the  district  in  which  they 
are  to  serve,  and  also  some  knowledge  of  law  and  accounting.  Several  of  our 
appointees  are  young  lawyers  and  many  have  had  accounting  experience.  Freedom 
from  politics  is  a  matter  of  paramount  importance  in  the  successful  admtnistration 
of  the  law." 

The  testimony  from  every  available  source  in  Massachusetts  con- 
firmed this  view  of  the  advantages  of  political  freedom  in  administration, 
and  of  centralization.  The  proper  and  adequate  and  equitable  assess- 
ment of  incomes  involves  a  considerable  degree  of  firmness  and  inquisi- 
torial authority  in  dealing  with  the  individual  taxpayer.  It  vi^ould  be 
fatal  to  the  successful  administration  of  such  a  tax  law  if  those  in  con- 
tact with  the  taxpayers  could  be  in  any  degree  influenced  by  local,  or 
partisan,  or  business  or  other  reasons.  It  cannot  be  too  strongly  empha- 
sized, therefore,  that  the  whole  administration  of  the  income  tax,  from 
top  to  bottom,  must  be  absolutely  removed  from  all  of  these  influences 
and  that  every  appointment  should  be  placed,  so  far  as  this  is  possible, 
on  a  merit  basis. 

In  return  for  these  effective  administrative  provisions,  the  tax- 
payer must  be  protected  by  secrecy  of  his  statements.  Only  the  duly 
authorized  ofiicials  and  clerks  may  inspect  the  returns  in  Massachusetts, 
and  a  severe  penalty  is  laid  upon  any  disclosure  of  individual  returns. 
The  tax  commissioner  is  now  required  to  say,  in  response  to  inquiry, 
whether  any  person  has  filed  a  return  or  not. 

For  the  actual  calculation  and  assessment  of  the  amount  of  income 
tax  due,  there  have  been  developed,  in  general,  two  methods.  One 
method,  which  is  illustrated  in  the  federal  practice,  is  to  require  the 
taxpayer  to  calculate  the  tax  due  and  remit  all  or  a  part  of  it  with  the 
return.  After  an  audit,  which  is  supposed  to  be  made  promptly  but 
which  may  not  occur  until  a  lapse  of  one  or  more  years,  the  correctness 
of  the  return  and  the  payment  is  finally  determined.  The  other  method, 
which  is  found  in  Massachusetts,  is  the  calculation  of  the  tax  due  by 
the  administrative  officials.  Returns  are  due  by  March  i,  the  assessment 
or  determination  of  the  tax  due  is  made  in  the  oflice  of  the  income  tax 
deputy  and  tax  bills  are  mailed,  by  September  i ;  and  the  tax  is  payable 
by  October  i.  This  plan  has  the  merit  of  a  prompt  determination  of  the 
tax  due,  although  it  is  open  to  the  objection  of  hasty  auditing,  additional 
clerical  and  postage  expense,  and  possible  inaccuracy  due  to  crowded 
work.  On  the  other  hand  it  may  lift  a  part  of  the  burden  of  preparing 
the  tax  return  from  the  taxpayer.   Certain  deductions  allowed  from  the 


95 


interest  and  dividends  taxable  under  section  2  are  permitted  by  section 
3,  and  the  calculation  involved  in  this  deduction  are  necessarily  per- 
formed by  the  tax  officials,  since  the  method  of  determining  the  deduc- 
ticm  provided  by  the  section  is  almost  certainly  inconq>rehensible  to  the 
average  taxpayer. 

A  necessary  part  of  the  administrative  machinery  of  every  tax  act 
is  the  procedure  for  review  and  abatement  of  assessments.  This  is 
always  a  difficult  problem,  for  neither  of  the  practicable  alternatives  is 
wholly  satisfactory.  In  general,  the  tax  assessing  and  administrative 
officials  may  be  designated  as  a  reviewing  board,  whose  findings  on  the 
facts  may  be  final ;  or  an  appeal  may  lie  to  some  outside  authority,  usually 
a  court,  which  is  often  lacking  in  the  technical  qualifications  required 
for  passing  upon  disputed  issues  of  fact.  All  things  considered  the  re- 
view upon  the  facts  should  be  conducted  by  the  higher  taxing  author- 
ities, with  proper  safeguards  for  the  protection  of  all  legal  rights  by  the 
courts. 

The  Massachusetts  procedure  really  combines  tiiese  alternatives. 
Any  person  aggrieved  by  the  assessment  of  a  tax  under  this  act  may  ap- 
peal to  the  tax  commissioner  within  three  months.  In  case  of  dissatis- 
facdon  with  the  tax  commissioner's  ruling,  the  appeal  may  be  carried 
either  to  a  board  of  review,  consisting  of  the  treasurer  and  auditor  of 
the  Commonwealth  and  a  member  of  the  governor's  council,  or  to  the 
superior  court  of  the  coimty  of  his  residence  or  place  of  business.  The 
former  alternative  permits  cases  involving  small  amounts  to  be  reviewed 
without  great  expense.  Thus  far  the  whole  number  of  such  appeals  has 
been  siiiall,  and  the  issue  most  often  raised  has  been  that  of  domicire. 

information  at  the  source  is  provided  by  requiring  all  corporations, 
associations,  partnerships  and  trusts  to  file  lis\s  of  all  employes  residing 
in  the  state  to  whom  wages  or  salary  in  excess  of  $i,8oo  was  paid  during 
the  preceding  calendar  year.  Foreign  corporations  doing  business  in  the 
state  are  required  to  file  a  list  of  their  Massachusetts  stockholders  and 
bondholders  to  whom  dividends  and  interest  were  paid.  The  treasurers 
of  cities,  towns  and  counties,  and  the  state  auditor,  are  required  to  file 
lists  of  employes  receiving  more  than  $i,8oo. 

'  The  problem  of  distribution  of  the  proceeds  of  the  income  tax 
proved  impossible  to  settle  out  of  hand,  and  the  Joint  Tax  Committee 
proposed  a  temporary  arr^gement  which  was  readjusted  each  year  until 
1919,  when  a  permanent  plan  of  distribution  was  adopted.  The  constitu- 
tional amendment  which  authorized  the  income  tax  did  not  impose  any 
restriction  upon  the  manner  of  the  distribution  of  the  proceeds,  and  the 
legislature  was  therefore  free  to  work  out  a  long  run  advantageous 
arrangement. 


96 


The  plan  for  the  first  year  was  to  preserve  the  status  quo  by  per- 
mitting each  city  and  town  to  receive  as  much  income  and  personal  prop- 
erty tax  in  191 7  as  they  had  received  from  the  taxation  of  all  classes  of 
personal  property  in  1916.  Any  siirplus  above  the  amount  of  income  tax 
cdkctions  required  for  lliis  purpose  was  to  be  distributed  locally  in  the 
proportimi  of  the  state  tax  levy  for  1917.  The  state  is  at  all  times  to 
retain  enough  to  pay  the  costs  of  administradon.  After  temporary  modi- 
fications in  191 7  and  1918  a  final  plan  was  inaugurated  in  191 9,  imder 
which  the  state  retains,  as  before,  sufficient  to  pay  the  costs  of  adminis- 
tration, and  distributes  the  balance  in  two  ways.  First,  to  each  city, 
town  and  district  shall  be  given  such  proportion  of  an  amoimt  equal  to 
the  difference  between  the  average  amount  of  tax  levied  upon  personal 
property  in  such  city,  town  or  district  in  the  years  191 5  and  1916,  and 
the  amount,  calculated  by  the  tax  conmussioner,  that  would  be  produced 
by  a  tax  upon  the  personal  property  actually  assessed  in  191 7  and  1918 
at  the  average  rates  which  prevailed  therein  in  the  years  191 5  and  1916, 
as  is  90%  thereof  for  1919,  80%  thereof  for  1920,  and  so  on  to  1928, 
when  this  feature  of  the  plan  will  disappear.  Second,  in  any  year  the 
surplus  of  the  tax  shall  be  distributed  in  proportion  to  the  state  tax 
levies,  and  after  1928  the  whole  proceeds  shall  be  so  distributed. 

This  final  aUocation  plan  was  the  recommendation  of  another  Joint 
Taxation  Committee,  which  reported  in  1919.  This  committee  consid- 
ered the  question  of  a  distribution  according  to  source,  but  advised 
against  it,  and  the  income  tax  deputy  spoke  very  strongly  against  such  a 
plan.  Some  of  the  difficulties  which  he  anticipated  were  incident  to  the 
local  situation  and  to  the  particular  kind  of  income  tax  which  is  now  in 
force  for  Massachusetts,  but  the  problems  of  domicile,  and  the  intricate 
accounting  problems  involved  in  the  determination  of  actual  source  of  the 
income,  are  universal.  In  this  sense,  the  determination  of  the  source  of 
incomes  and  the  apportionment  among  districts  is  the  interstate  problem 
in  miniature.  The  general!  difficulty  can  only  be  solved  by  an  arbitrary 
plan  of  apportionment  which  preserves  as  much  as  possible  of  the  equi- 
ties in  the  case.  Such  a  distribution  according  to  source  is  attempted  in 
Wisccmsin,  and  it  is  accomplished  by  an  arbitrary  rule  which  is  discussed 

later.^  * 

The  first  result  of  these  years  of  income  taxation  in  Massachusetts 

has  been  a  greatly  improved  attitude  of  taxpayers  toward  the  whole 
question  of  assessment  and  taxpaymg.  This  change,  which  was  testified 
to  by  lawyers  and  business  men  as  well  as  by  the  state  tax  officials,  is 
the  result  of  the  better  equalization  of  the  tax  burden  which  is  accom- 
plished under  the  inccwne  tax.   The  advantage  which  was  once  obtained 

^  See  bdow,  p.  116. 


97 


by  the  colonizing  movement  is  now  negatived,  and  the  strict,  impartial 
and  efficient  administration  of  a  state-wide  tax  has  made  competitive 
tax  dodging  quite  unpopular.  The  people  generally  have  already  ac- 
cepted the  income  tax  as  a  matter  of  course,  they  are  rapidly  adjusting 
their  affairs  to  it,  and  there  appears  to  be  a  general  confidence  in  the 
adequacy  and  hcmesty  of  its  operation. 

Another  gain  is  in  the  increased  revenue  which  the  income  tax  has 
produced.  The  following  table  from  the  tax  commissioner's  report  for 
1917  shows  the  preliminary  results  under  the  first  assessment: 


(000  omitted.) 


Class. 

No.   of  Re- 
turns. 

Business  In- 
Come. 

3%  Gains. 

Annuities. 

Interest  and 
Dividends. 

Exemptions, 
6%  Class. 

Total. 

162.217 

10,071 
13,8!)5 

$1,625 

924 
12 

$no8 

176 
51 

$24 

$6,435 
453 
1.349 

$103 

7 
5 

$8  603 
1,553 
1.411 

186.183 
5.000 

$2,562 
15.04K) 

$835 
1.5 

$24 

$8,237 
461 

$115 

11,658 
477 

191.183 

$2,577 

$837 

$24 

$8,698 

$.20 

12,135 

The  amount  of  intangibles  assessed  in  1916  and  the  tax  derived 
therefrom  are  not  ascertainable  since  the  Massachusetts  tax  returns  did 
not  separate  the  two  classes  of  personalty.  It*  required  $8,120,621  to 
reimburse  the  cities  and  towns  in  1917  for  the  loss  in  taxes  due  to  the 
decrease  in  the  total  personalty  assessed  in  191 7  below  the'  amount  as- 
sessed in  191 5.  This  decrease  represents  the  amount  of  tax  which,  it  is 
assumed,  had  been  derived  from  intangibles,  plus  a  small  allowance  for 
a  fuller  disclosure  of  tangible  property  in  191 7.  Estimating  the  loss  due 
to  the  $300  exemption  and  that  due  to  the  exemption  of  non-resident 
beneficiaries  of  estates  and  trusts  at  $2,100,000,  the  former  yield  of  that 
part  of  the  intangibles  which  paid  income  tax  in  1917  was  about  $6,367,- 
000  to  $6,867,000.  The  new  tax  represented,  therefore,  a  real  gain  of 
about  $2,000,000  in  the  first  year.  The  old  tax  on  business  incomes  pro> 
duced  $770,228  in  191 6,  as  compared  with  $2,577,061  under  the  new  law. 
The  3%  tax  on  gains  from  dealings  in  intangibles  was  new,  and  pro- 
duced $837,000.  By  July  31,  1919,  the  net  assessment  of  incomes  for 
IQ17  had  reached  $12449,655,  through  various  corrections  and  additions 
made  by  the  tax  commissioner.  The  assessment  for  19 18,  at  the  date  ot 
publication  of  the  annual  report,  was  $14,387,339.   The  assessment  for 


98 

1919  was  in  prc^ess  during  the  summer  and  no  figures  were  available 
It  is  quite  evident,  however,  that  the  income  tax  on  interest  and  divi- 
dends is  proving  to  be  very  much  more  productive  of  revenue  than  was 
the  former  tax  at  high  rates  on  the  capital  value  of  such  intangibles  as 
were  hsted.  This  fact  is  the  clearest  possible  evidence  of  the  extent  to 
which  successful  evasion  went  on  under  the  earlier  tax  system,  and 
demonstrates  beyond  doubt,  cavil  or  contradiction  the  wisdom  of  the 
change  made. 

The  new  tax  is  not  only  yielding  more  revenue,  but  it  is  distributing 
the  taxes  on  this  class  of  property  vastly  more  equitably  than  could 
possibly  have  been  the  case  before.  Under  the  general  properly  tax  the 
owners  of  large  amounts  of  intangibles  either  escaped  entirely,  or  se- 
cured  immunity  by  emigrating  to  one  of  the  numerous  tax  colonies  in 
which,  in  return  for  a  moderate  compromise  assessment,  an  absurdly  low 
tax  rate  was  established.  Of  one  of  these  tax  colonies  the  Joint  Com- 
mission of  1919  wrote  as  follows:  * 

♦ifii  nP^r"^**  famous  case  was  of  the  town  of  Orleans,  which  in  1910  had  taxed 
1181,000  of  personal  property  at  the  rate  of  $15  per  $1,000.  The  next  year  the 
assessment  of  personal  property  was  increased  to  $968,000  and  (lie  rate  fell  to  $300 
m  1910  assessment  of  personal  property  had  further  increased  to  $3,941,000  and 
with  the  corporation  and  bank  taxes  it  was  necessary  to  make  the  most  lavish 
expenditures  for  highways  and  other  improvements  in  order  to  have  any  rate  at  air. 

The  wealthy  owner  of  intangibles  is  no  longer  able  to  purchase 
unmunity  for  himself  at  the  expense  of  the  small  investor,  the  widows 
and  origans  whose  funds  are  in  the  hands  of  fiduciaries,  and  that  small 
band  in  every  community  whose  exaggerated  sense  of  honesty  compells ' 
them  to  list  every  dollar  of  their  intangibles  regardless  of  the  general 
practice  of  the  community  and  regardless,  too,  of  the  fact  that  their 
action  subjects  them  to  substantial  confiscation  of  the  income  from  their 
property.  So  far  as  intangibles  are  concerned,  the  Massachusets  law 
has  the  supreme  merit  of  effecting  a  genuine  and  lasting  equalization  of 
harden  amcn^  the  owners  of  intangibles  by  widening  the  tax  base  and 
lowering  the  tax  rates. 

This  equalization  of  tax  burden  has  been  improved  also  as  between 
the  whole  class  of  intangibles  and  the  property  which  remains  subject 
to  taxation  at  local  rates.  The  increase  of  revenue  from  the  intangibles 
is  the  best  evidence  of  this  improvement.  The  method  of  distribution 
which  was  adopted  tended  to  stimulate  the  local  assessment  of  tangibles, 
for  eadi  community's  share  of  the  income  tax  was  influenced  by  the  mar- 
gm  between  the  total  assessment  of  personal  property  before  the  income 


Report  of  the  Joint  Special  Commission,  1919,  p.  41 


99 


tax  act  went  into  effect  and  the  assessment  of  personal  property  remain- 
ing subject  to  local  taxation  in  the  year  following.  Every  local  asses- 
sor was  therefore  under  a  stimulus  to  increase  the  assessment  of  tangibles, 
and  considerable  progress  has  been  made  in  overcoming  the  loss  to  the 
grand  duplicate  due  to  the  withdrawal  of  intangibles,  as  the  following 
table  shows:  « 


TOTAL  ASSESSMENT  OF  PROPERTY  YEARS  1916-1918.  (000.000) 


Year. 

Assessed  Per- 
sonal, ex- 
cluding 
Bank  stock. 

Resident 
Bank  stock. 

Buildings. 

Lands. 

Total. 

Grand  Total. 

19^6   

$1,208.0 
694.7 
817.5 

1 

$33.2 
30.3 
32.7 

$1,998.1 
2,091.0 
2,149.6 

$1,687.0 
1,715.5 
1,734.6 

$3,685.1 
2.806.8 
3,884.2 

$1,926.1 
4,o31.8 
4,734.6 

1917   

1918   

The  first  column  included  in  1916  all  personalty,  but  in  1917  and 
thereafter  it  includes  simply  the  tangible  personal  property.  It  is  sig- 
nificant that  the  assessment  of  tangibles  increased  $122,700,000  in  1918 
while  the  aggregate  of  lands  and  buildings  increased  only  $74,300,000. 
Such  a  relative  rate  of  increase  will  of  course  not  be  maintained,'  but 
this  growth  in  the  assessment  of  tangibles,  together  with  the  increased 
revenue  which  is  being  obtained  from  intangibles  under  the  new  system, 
shows  conclusively  that  a  wholesome  redistribution  of  tax  burden  as 
between  real  estate  and  personal  property  is  in  process. 

Another  beneficial  result  of  the  income  tax  in  Massachusetts  has 
been  a  better  equalization  of  distribution  of  tax  burden  among  the 
various  communities  of  the  state.  Reference  has  already  been  made 
to  the  vicious  practice  of  tax  colonization  which  was  so  notoriously 
common  under  the  former  system.  This  is  a  practice  which  is  not  un- 
known in  Ohio  though  it  has  probably  not  attained  the  proportions  that 
it  did  in  Massachusetts.  And  yet,  there  are  possibly  hundreds,  even 
thousands  of  instances  over  tl^e  state,  of  citizens  who  have  maintained 
a  tax  domicile  or  residence  in  a  country  place  or  small  village  in  order 
to  obtain  the  advantage  of  low  tax  rates.  Enough  property  has  been 
returned  in  these  districts,  with  their  small  revenue  needs,  to  keep  the 
tax  rates  down,  while  the  growing  municipalities  in  which  these  individ- 
uals have  conducted  their  successful  and  profitable  business  operations 
have  groaned  under  excessive  rates  or  have  been  threatened  with  finan- 


100 


dal  asphyxiation  under  the  onerous  restrictions  of  our  tax  limit  law. 
The  S3rstein  of  distribution  applied  in  Massachusetts  has  turned  the  bu!k 
of  the  income  tax  receipts  back  to  the  deserving  municipalities,  because 
of  the  proportion  of  state  tax  which  has  been  derived  from  these  dis- 
tricts. The  manufacturing  towns  which  have  really  produced  the  income 
are  enabled  thus  to  derive  a  proportionate  benefit  from  the  tax,  and  so 
an  equalization  among  communities  has  been  effected. 

The  beneficial  effects  of  the  permanent  income  tax  distribution 
scheme  will  henceforth  be  interfered  with  in  some  degree  by  an  educa- 
tion bill  passed  in  1919,  but  this  resu't  is  in  no  way  to  be  attributed  to 
the  income  tax  itself,  nor  wdl  it  follow  that  an  advantage  will  again 
accrue  to  the  formerly  flourishing  tax  colonies.  The  education  bill  aims 
at  a  redistribution  of  a  portion  of  the  income  tax  receipts  on  the  basis  of 
the  needs  of  the  schools,  which  means,  in  effect,  and  the  act  so  provides, 
that  the  poorer  school  districts,  with  small  property  valuations  and  a 
lower  range  of  salaries  for  school  feachers,  are  to  be  aided  in  school 
maintenance  by  the  more  wealthy  and  prosperous  sections.  Under  this 
plan  it  was  estimated  that  the  following  cities  would  experience  losses 
in  1919  as  shown  below: 


Receipts       Loss  From 
to  School  Fund  Income  Tax    Net  Lost 

 V •   1627,700     .11,187.355  $559,655 

New  Bedford   87.340  107,415  20.105 

Springfield    136,700  159,432  22.733 

Lowell   67,800  83,148  15.a48 

Lawrence   65,550  75,348  9,798 

Fitchburg   29,6('0  37,128  7.528 

Holyoke   *   53,610  60,099  6,489 

f 
t 


These  losses  are  serious  and  especially  in  the  case  of  Boston  will 
have  rather  disastrous  effects  for  the  present  upon  the  property  tax 
rates.  There  is  no  immediate  prospect  that  the  situation  may  be  cor- 
rected within  the  income  tax,  but  some  other  changes  in  the  tax  system 
may  soon  afford  compensatory  relief  to  the  industrial  centers.  These 
changes  relate  to  the  system  of  corporate  taxation  and  they  will  be 
briefly  outlined  because  of  their  rather  intimate  bearing  upon  the  per- 
sonal income  tax  and  also  because  they  are  suggestive  of  the  coarse 
which  this  committee  may  wish  to  pursue  with  r^;ard  to  the  taxation 
of  OHporations. 

The  system  of  corporate  taxation  in  Massachusetts  is  too  compli- 
cated to  be  described  in  detail  here.  In  brief  it  is  a  system  of  frsmchise 
valuation,  which  is  taken  to  be  the  excess  of  the  value  of  the  capital 
stock  over  the  value  of  property  knally  taxed  (real  estate,  machinery). 


property  located  outside  the  state  and  taxed  where  located  and  exempt 
securities.  In  1903  the  franchise  assessment  was  limited  to  120%  of 
the  valuation  of  real  estate,  machinery,  merchandise  and  taxable  securi- 
ties. The  assessment  is  made  by  the  tax  commissicmer  and  the  tax  is 
levied  at  the  average  rate  of  taxation  upon  all  property  in  the  state. 

It  was  inevitable  that  serious  inequalities  and  injustices  should 
develop  in  the  operation  of  such  a  rigid  and  mechanical  system  of  cor- 
porate valuation.  These  have  been  pointed  out  by  the  tax  commis- 
sioner, by  various  students  of  the  subject,  and  by  more  than  one  legis- 
lative committee.  No  definite  proposals  for  change  were  considered 
until  last  year,  when  a  special  committee  on  the  corporation  tax  recom- 
mended the  abolition  of  the  whole  system  of  franchise  taxation  and  the 
adoption  of  a  corporation  income  tax.  In  order  to  safeguard  the  state's 
revenues  this  committee  was  obliged  to  include  in  its  bill  certain  minimmn 
provisions  which  amounted,  in  effect,  to  classification  of  property,  since 
they  involved  the  imposition  of  low  tax  rates  on  corporate  property.^ 
Such  a  classification  was  repugnant  to  the  unifority  clause  of  the  state 
constitution  and  this  proposal  was  dropped.  Because,  of  the  unprece- 
dented state  expenditures  occasioned  by  the  war  emergency,  revenue 
measures  applying  to  corporations  were  passed  which  were  substanti- 
ally similar  to  the  plan  now  in  effect  in  Connecticut. »  All  corporations 
doing  business  in  the  state,  both  domestic  and  foreign,  were  required 
to  file  with  the  tax  commissioner  true  copies  of  their  returns  to  the 
commissioner  of  internal  revenue  under  the  federal  income  tax,  and  a 
tax  of  1%  was  laid  upon  the  corporate  net  income  as  shown  by  these 
returns.    These  laws  were  revived  for  one  year  in  1919. 

Meantime,  another  Joint  Legislative  Committee  on  Taxation  had 
been  created  to  study  the  problem  further,  and  this  committee,  reporting 
in  1919,  was  unable  to  endorse  the  corporation  income  tax  plan  of  1918 
for  the  reasons  given.  It  did  recommend  the  submission  of  a  classifica- 
tion amendment,  which,  if  adopted,  would  make  possible  impartial  con- 
sideration of  the  proposal.  It  advised  further  study  of  this  plan  of 
corporate  taxation,  which  it  held  had  not  yet  received  general  approval 
in  Massachusetts.  In  the  meantime  it  proposed  certain  changes  in  the 
existing  system  of  franchise  taxation  which  aimed  at  the  elimination  of 
the  injustices  while  they  provided  larger  revenues  from  business  cor- 
porations. Under  the  change  made  one-sixth  of  the  tax  is  retained  by 
the  state  (being  the  average  amount  accruing  to  the  state  in  tiic  years 

^Report  of  the  Joint  Special  Committee  on  Corporation  Tax,  lfll8,  p.  lOl 
'Report  of  the  Joint  Special  Committee  on  Taxation,  1919,  p.  24. 
'Laws  of  Massachusetts,  1918,  chs,  253,  155:  revived  for  one  year  by  Laws. 
J918,  ch.  343.  /       /  -» 


I02 


1910-1917  on  account  of  no>n-resident  stockholders)  and  the  balance  is 
distributed  locally  in  proportion  to  the  assessment  of  tangible  property 
of  the  corporations.  ^  The  increased  amounts  which  will  go  to  the  indus- 
trial centers  under  this  act  will  offset  the  estimated  losses  due  to  the 
education  act  of  1919.  Incidentally,  the  state's  revenues  will  be  en- 
hanced, to  the  general  benefit  of  property  locally  taxed. 

Certain  changes  in  the  rates  of  the  income  tax  have  recently  been 
adopted  which  illustrate  the  flexibility  of  this  part  of  the  revenue  sys- 
tem. It  has  long  been  the  practice  in  England  to  vary  the  rate  of  the  in- 
come tax  in  making  the  final  adjustment  between  estimates  of  expenses 
and  receipts.  With  the  development  of  an  adequate  budget  system 
in  this  country,  a  similar  flexible  adjustment  might  prove  possible. 
The  attainment  of  this  ideal  is  yet  far  distant  with  us,  but  the  Massa- 
chusetts experiments  prove  its  fea.sibility,  fr<Mn  the  revenue  side.  In 
191B  an  increase  of  10%  was  ordered  in  the  amount  of  tax  collected 
under  section  2,  that  is,  interest  and  dividends.  ^  This  was  an  emer- 
gency measure,  in  effect  for  one  year  only.  In  1919  the  rate  on  business 
incomes  received  during  the  years  1918  and  1919  was  subjected  to  an 
additional  tax  of  1%.  ^  The  exact  yield  of  these  measures  is  not 
available,  but  reference  to  the  table  on  p.  97  will  give  some  idea  of 
die  amount  which  might  be  available. 

The  cost  of  administration,  while  large  in  the  aggregate,  is  a  small 
proportion  of  the  total  tax  collected.  In  this  respect  the  income  tax 
appears  to  conform  to  Adam  Smith's  proposition  that  a  good  tax  is  <wie 
which  is  "so  contrived  as  to  take  out  and  keep  out  of  the  pockets  of 
tlie  people  as  little  as  possible  over  and  above  what  it  brings  into  the 
pubHc  treasury  of  the  state".  The  expense  for  the  first  year  was  en- 
hanced naturally  by  the  outlays  fOr  equipment  incident  to  the  creation 
of  a  new  division  in  the  tax  commissioner's  office.  The  figures  for  the 
first  two  years  follow : 

i9ir  1918 

Total  cost  of  Income  Tax  Administratioii   ^226,356  $208,027 

Percentage  of  total  tax  assessed   1 .88%        1 .44% 

The  Coiiiiecti<»it  Tax  cm  the  Incomes  of  Corpmitioiis. 

Connecticut's  experience  with  income  taxaticm  has  been  of  much 
more  limited  scope  than  that  of  Massachusetts.   The  act  now  in  force 

^  Laws  of  Massachusetts,  1919,  cfa.  355, 
*Ibid,  1918,  ch.  252. 
•Ibid,  1919,Gfa«32i 


103 

was  passed  in  1915,^  and  required  miscellaneous  business  corporations 
to  make  annually  to  the  tax  commissioner  a  true  copy  of  the  last  return 
made  by  the  corporation  to  the  federal  revenue  department.    A  state 
tax  of  2%  was  imposed  upon  the  net  income  as  this  was  computed  under 
the  federal  law,  to  be  paid  into  the  state  treasury  for  state  purposes.  In 
the  act  of  191 5  an  attempt  was  made  to  designate  the  definite  deductions 
to  be  allowed  from  gross  income.    These  deductions  were  similar  in 
phrasing  and  meaning  to  the  deductions  permitted  by  the  federal  income 
tax  in  force  at  that  time.  Because  of  the  frequent  changes  which  were 
made  in  the  federal  law  in  the  next  two  or  three  years  it  seemed  advis- 
able to  substitute  for  the  enumeration  of  specific  deductions  the  simple 
requirement  that  corporations  subject  to  the  tax  should  report  "such  in- 
formation as  may  be  required  by  the  United  State  treasury  department 
for  the  purpose  of  ascertaining  the  total  amount  of  net  income  taxable 
under  the  federal  income  tax  act."*    The  forms  prescribed  by  the  tax 
commissioner  have  followed  those  used  by  the  federal  department,  with 
spaces  for  the  additional  information  required  by  the  Connecticut  tax 
commissioner. 

Provision  was  made  for  supplementary  returns  and  for  collection 
or  refund  of  tax  in  case  of  changes  or  correcticms  in  the  returns  by  the 
commissioner  of  internal  revenue.  Failure  to  make  a  return,  or  the 
making  of  a  fraudulent  return,  was  made  punishable  by  a  fine  of  not 
more  than  $10,000,  and  any  person  who  made  a  false  return  with  intent 
to  evade  the  tax  was  made  liable  to  a  fine  of  not  more  than  $2,000  or 
imprisonment  for  not  more  than  one  year,' or  both.  In  addition,  a  pen- 
alty  of  doubled  tax  was  added  for  false  return,  and  of  50%  increased 
tax  for  failure  to  make  a  return.  All  books  and  papers  were  to  be  open 
to  the  inspector  of  the  tax  commissioner,  and  an  appeal  was  allowed  to 
the  superior  court  of  Hartford  county. 

This  imposition  by  a  state  of  a  super-tax  upon  an  object  of  federal 
taxation  naturally  involved  the  problem  of  apportionment  of  interstate 
income.  The  Connecticut  method  certainly  possesses  the  advantage  of 
simplicity,  and  it  may  be  fully  as  equitable  as  some  of  the  imre  compli- 
cated, but  at  the  same  time,  arbitrary  rules  in  use  iA  other  states.  If  the 
profit  of  a  company  doing  business  in  more  than  one  state  were  derived 
principally  from  the  ownership,  sale  or  rental  of  real  estate,  or  if  it  were 
derived  principally  from  the  sale  or  use  of  tangible  personal  property, 
such  proportion  of  the  net  income  was  to  be  taxed  in  Connecticut  as  the 
fair  cash  value  of  the  real  estate  and  tangible  personal  property  in  the 


'Laws  of  Connecticut,  1915,  ch.  292. 
'Ibid,  1917,  ch.  298. 


iye«r.y  (RectipU  in  round  numbers.) 

^^^^   $1,600,000 

1^17   8.180.000 

^918    2.000.000 

  1,700^ 

These  figures  show  that  the  peak  was  soon  reached,  and  a  steady  de- 
cline after  1917  has  brought  the  yield  for  1919  down  almost  to  the  amount 
produced  in  the  first  year.  The  explanation  for  this  loss  is  the  provision 
which  permits  the  deduction  of  federal  income  taxes;  which  of  course 
nc'udes  the  tax  on  excess  profits.  At  the  same  time. the  administrative 
diffi  ulties  have  been  very  greatly  increased  by  the  operation  of  this 
provisicm.  This  situation,  with  the  loss  of  revenue  and  the  administra- 
tive omplications  which  it  entails,  will  of  course  continue  as  long  as  me 
federal  tax  on  excess  profits  endures.  The  general  question  of  the  deduc- 

'  G>iuiecticut  Tax  Conmiission.  Report,  1918,  p.  52. 


104  A 

State  at  the  close  of  the  fiscal  year  bore  to  the  fair  cash  value  of  the 
entire  real  estate  and  tangible  personal  property,  with  no  deductions  on 
account  of  incumbrances  thereon.  If  the  profit  were  derived  principally 
from  the  holding  or  sale  of  intangible  property,  the  net  income  was  to  be 
apportioned  on  the  basis  of  the  relative  gross  receipts  for  the  fiscal  year 
within  and  without  the  state. 

An  evident  defect  in  this  method  of  apportionment,  in  the  case  of 
the  first  class  of  corporations,  is  the  use  of  one  figure,  the  fair  cash 
value  at  the  close  of  the  fiscal  year.  It  is  possible  under  this  provision 
for  "window-dressing'"  to  reduce  the  proporticm  of  movable  assets  within 
the  state  by  depletion  of  stocks,  and  in  other  ways.  It  is  quite  apparent, 
also,  that  with  the  spread  of  the  plan  of  levying  a  super-tax  upon  cor- 
porate incomes  including  those  from  interstate  business,  serious  compli- 
cation will  arise  unless  there  is  a  uniform  method  of  apportioning  income. 
That  this  uniformity  will  not  be  attained  is  fairly  certain,  for  the  New 
York  and  the  Wisconsin  plans  of  apportionment  both  differ  from  the 
Connecticut  plan.  1  he  conflicts  of  interest  among  the  states  are  impor- 
tant and  real,  and  in  the  years  to  come  they  may  become  a  source  of 
severe  multiple  taxation  upon  large  interstate  businesses,  unless  there  is 
a  genuine  effort  at  uniformity  at  this  point. 

At  the  outset  the  Connecticut  law  was  apparently  simple  enough  ^ 
and  it  produced  a  substantial  revenue  at  a  very  slight  cost  of  administra- 
tion. In  his  report  for  191 6  the  tax  commissioner  discussed  these  fea- 
tures of  the  law  with  enthusiasm  and  optimism  and  at  the  time  there 
seemed  to  be  good  ground  for  his  attitude.  The  subsequoit  experience 
is  revealed  by  the  figures  showing  the  annual  yield:* 


105 


tion  of  federal  taxes  will  be  discussed  in  connection  with  the  New  York 
law.^  With  the  administrative  methods  adopted  it  wouM  have  been 
rather  incongruous  for  Connecticut  to  refuse  the  deduction,  and  of 
course,  when  the  act  was  passed  no  such  burden  of  federal  taxation  was 
anticipated  as  has  actually  come  to  pass.  Neither  did  the  administrative 
officials  anticipate  the  very  serious  complexities  which  were  to  be  intro- 
duced with  the  later  federal  legislation.  The  deputy  in  charge  of  the 
tax  was  positive  that  had  Mr.  Corbin  been  gifted  with  prophetic  fore- 
sight, this  particular  plan  of  corporate  taxation  would  never  have  been 
introduced.  It  has  been  especially  troublesome  to  keep  up  with  all  of 
the  amended  reports  which  taxpayers  have  filed  with  the  federal  revenue 
officers,  to  check  their  accuracy,  and  to  carry  through  the  necessary  ad- 
ministrative detail  which  this  apparently  endless  succession  of  changes 
involves. 

The  act  has  thus  far  withstood  the  test,  in  the  courts.  The  Under- 
wood Typewriter  Company  refused  to  pay  its  taxes  in  each  of  the  first 
three  years,  and  the  case  was  taken  to  the  supreme  court.  With  one  dis- 
senting vote  the  court  held  that  the  tax  was  not  a  restraint  on  interstate 
commerce,  but  a  privilege  tax,  and  within  the  field  of  the  valid  exercise 
of  the  state's  power  to  tax.  The  law  was  also  held  to  be  not  in  violation 
of  the  14th  amendment,  since  it  was  a  reasonable  levy,  on  a  reasonable 
apportionment  of  the  company's  income  to  the  state.* 

The  New  York  Income  Tax  Law. 

The  financial  situation  in  New  York  which  led  to  the  adoption  of  an 

income  tax  was  quite  similar  to  that  Which  exists  in  Ohio  today,  al- 
though in  some  respects  matters  were  even  worse  in  the  former  state. 
The  theoretical  basis  of  the  New  York  system  was  the  property  tax,  but 
through  two  generations  of  ineffective  administration  this  tax  had  be- 
come almost  entirely  a  tax  on  real  estate.  Thus,  in  1866  the  proportion 
of  personal  property  to  total  assessment  was  25.5% ;  in  1870  it  was  22%. 
in  1898,  14.6%,  and  in  iQi4,*only  377%.  At  various  times  special  taxes 
had  been  imposed  on  different  classes  of  personal  property,  such 
bank  shares,  mortgages,  vehicles,  etc.  But  all  of  the  authorities  agree 
that  these  exemptions  have  had  no  long  run  effect  upon  the  amount  of 
personal  property  assessed ;  rather,  the  state  tax  commission  has  insisted 
that  they  are  indicative  of  the  large  amounts  of  taxable  property  whic^ 
have  continued  to  escape  taxation. 


*  See  below,  p.  109. 

'Underwood  Typewriter  Co.  v.  Champion. 


io6 


The  tax  situation  in  New  York  has  be^  the  subject  of  serious 
study  by  a  number  of  special  tax  commissions.  The  latest  of  these  was  a 
joint  legislative  committee,  which  published  an  admirable  report  in  191 6. 

To  this  committee  the  legislature  had  submitted  the  following  question — • 
"How  can  the  state  most  equitably  and  effectively  reach  all  property 
which  should  be  subjected  to  taxation  and  avoid  conflict  and  duplication 
of  taxation  of  the  same  property?'*  A  part  of  the  committee's  reply 
to  this  question  is  as  follows :  ^ 

''Without  passing  upon  the  broad  questions  of  public  policy  involved  in  the 
adoption  of  a  new  tax  system  whidi  questions  should  more  properly  be  decided  by 
the  legislature  as  a^  whole,  this  Committee,  in  answer  to  the  specific  question  sub- 
mitted to  it,  desires  to  state  that  all  of  the  evidence  presented  and  all  onr  investi- 
gations, tend  to  show  that  the  end  sought  for  will  be  accomplished  best  by:  1)  the 
abolition  of  the  present  tax  on  personal  property;  2)  the  wididrawal  of  general 
business  incomes  from  the  provisions  of  section  182  oi  the  tax  laws;  and  3)  the 
impositicm  of  an  income  tax  on  individuals  and  geneial  business  curporatioiis, 
induding  manufacturing  corporations/' 

The  recommendation  for  a  general  income  tax  did  not  meet  with 
legislative  approval  in  191 7.    The  principle  of  income  taxation  was 

adopted,  however,  in  the  franchise  tax  imposed  upon  mercantile  and 
manufacturing  corporations,-  This  law  was  re-written  in  19 19  and  little 
attention  will  be  given  the  earlier  draft  except  to  note  its  place  in  the 
evolution  of  the  New  York  income  tax  laws.  It  was  very  successful  as 
a  revenue  producer.  For  the  first  eight  months,  November  i,  1917,  to 
June  30,  1918,  the  comptroller  reported  collections  amounting  to  $14,- 
769,275.'  The  loss  due  to  the  withdrawal  of  these  classes  of  corpora- 
tions from  section  182  (the  franchise  tax  on  capital  stock)  was  reported 
as  $172,466. 

Nothing  was  accomplished  by  this  act,  however,  to  correct  the  in- 
equalities and  injustices  in  the  operation  of  the  property  tax,  to  which 
the  joint  cmnmittee  of  1916  had  so  ably  called  attention.  Various  in- 
terests in  the  state  became  active  in  pressing  the  campaign  for  a  reform 
of  the  property  tax,  and  in  1919  a  legislative  committee  presented, a  bill 
for  the  imposition  of  a  tax  on  personal  incomes.  This  committee  made 
no  published  report,  but  it  established  connections  with  many  of  the 
organizations  which  were  interested  in  the  subject  and  conducted  a  series 
of  hearings  in  which  various  angles  of  the  problem  were  presented.  The 
outcome  was  the  introductimi  of  a  bill  in. the  preparation  of  which  the 

'  Report  of  the  Joint  Le'gislative  Committee  on  Tustation,  p.  208, 

*Laws  of  New  York,  1917,  ch,  726. 

'  Con^troller  of  New  York,  Report,  191%,  p.  xvii. 


107 


committee  had  had  the  assistance  of  a  number  of  able  students  of  taxa- 
tion, including  Professors  C.  J.  Bullock,  of  Harvard  University,  and 
E.  R.  A.  Seligman,  of  Columbia  University.  The  bill  was  enacted  with- 
out substantial  change  except  for  the  transfer  of  the  administration  of 
the  law  from  the  state  tax  commission  to  the  state  ccmiptroller.  This 
change  was  made  in  the  closing  days  of  the  session  for  partisan  political 
reasons,  as  is  frankly  admitted  on  all  sides  in  Albany. 

This  act,  imposing  a  tax  on  personal  incomes,  together  with  the 
amended  tax  on  business  corporations,  brings  New  York  well  into  line 
in  the  practical  application  of  the  program  suggested  by  the  committee 
on  a  model  application  of  the  program  suggested  by  the  committee  on 
a  model  tax  system.  Your  committee  has  already  decided  upon  a  personal 
income  tax,  and  the  New  York  model  is  perhaps  the  best  one  for  it  to 
follow^  although  some  features  of  that  law  were  not  approved  by  the 
leaders  in  taxation  in  New  York  and  should  not  be  introduced  here.  In- 
stead of  undertaking  a  summary  of  the  act,  a  copy  of  it  is  made  a  part 
of  this  report  and  copies  are  put  into  the  hands  of  the  committee,  (This 
bill  is  not  here  printed  as  a  part  of  the  report.)  The  ^ce  of  this  report 
is  given  over,  then,  to  comments  upon  various  features  of  the  act,  with 
special  emphasis  upon  those  points  at  which  caution  should  be  exercised 
in  following  the  New  York  statute.  For  convenience  in  reference,  the 
comments  will  follow  the  section  numbering  of  the  law. 

Section  350.  The  practice  of  giving  a  list  of  definitions  is  char- 
acteristic of  the  New  York  tax  laws.  It  is  .thoroughly  commendable. 
Section  351.  The  attempt  to  tax  nonresidents  upon  the  income  from  * 
pro]>erty  owned  and  from  business,  traded,  professions  or  occupations 
carried  on  in  New  York  was  inspired  by  a  local  situation  which  has  no 
parallel  in  Ohio.  A  large  number  of  persons  do  business  or  earn  in- 
comes in  New  York  and  reside  in  New  Jersey,  and  the  tax  on  nonresi- 
dents was  confessedly  aimed  directly  at  this  group.  The  taxation  of 
nonresidents  is  not  approved  by  the  committee  on  a  model  tax  system, 
and  its  argument  against  the  practice  is  familiar  to  this  committee. 

Mooreover,  this  feature  of  the  New  York  law  has  already  been  the 
subject  of  litigation,  and  was  recently  held  unconstitutional  by  Judge 
Knox  of  the  United  States  circuit  court,  the  principal  basis  for  the  de- 
cision being  that  nonresidents  were  discriminated  against  in  the  deduc- 
tions and  exemptions  allowed.^  The  case  will  go  to  the  supreme  court  and 
in  the  meantime  the  legislature  will  be  asked  to  coirect  the  defects  which 
seemed  to  weigh  with  the  court.  If  possible  New  York  will  retain  some 
means  of  taxing  the  " Jersey ites",  but  any  state  which  has  no  such  local 


*  The  Yale  and  Town  Manufacturing  Co.  v.  Travis. 


io8 


problem,  and  Ohio  does  not  have,  would  better  not  make  the  attempt  to 
reach  nonresidents  on  their  persona]  incomes. 

Section  352.  This  section  exempts  intangibles  from  the  property 
tax.  The  committee  on  a  model  system  recommended  this,  and  it  is  done 
m  Massachusets  and  Wisconsin,  as  well  as  in  New  York.  Whether  u 
can  be  d<Mie  in  Ohio  wiU  of  course  depend  upon  the  outcome  of  the 
next  election.  If  the  classification  amendment  fail,  there  would  seem 
to  be  no  authority  for  exempting  intangibles,  or  even  of  taxing  them 
at  lower  rates  than  are  applied  to  other  property.  It  appears,  therefore, 
to  be  vitally  necessary  to  the  success  of  an  income  tax  in  Ohio  Uiat  the 
legislature  be  free  either  to  exempt  intangibles  entirely  or  to  tax  them 
at  a  much  lower  rate.  The  clause  "and  from  which  any  income  is  de- 
rived" does  not  appear  in  the  original  draft.  It  is  an  ill-advised  addi- 
tion and  will  be  meaningless  in  its  practical  effect. 

Sections  355-358,  dealing  with  gains  through  exchange,  inventory, 
and  the  definition  and  computation  of  net  income,  follow  the  federal 
sections  on  the  same  subject,  sections  202,  203,  212,  213,  of  the  act  of 

Section  359.  The  definition  of  gross  income  in  the  first  part  of  thi« 
section  folbws  the  federal  wording,  except  for  the  inclusion  of  the  in- 
come of  certain  federal  dHcials.  Sub-divisions  (a),  (b),  (c)  and  (e) 
of  the  forms  of  exempt  income  are  also  identical  with  the  federal  provi- 
sions; sub-division  (d),  relating  to  the  exemption  of  interest  on  govern- 
ment bonds,  exempts  specifically  the  investments  on  which  the  mort- 
pge  registry  tax  has  been  paid.  Sub-divisi<m  (f)  exempts  all  of  the 
income  of  persons  in  the  military  or  naval  service,  instead  of  limiting 
the  cxcmpticm  as  in  the  federal  act.  Sub-division  (g)  appears  to  be 
si^ierfluous  in  view  of  the  definition  of  gross  income;  it  was  written 
into  the  act  for  the  reassurance  of  various  rehgious  and  educational 
organizations. 

Section  360.  Many  of  the  paragraphs  of  this  section  are  taken 
directly  from  section  214  of  the  federal  act  Paragraphs  i,  4,  5,  7  and 
8  are  transferred  without  change ;  9  is  similar  except  for  a  change  in 
dates;  10  allows  a  15%  deduction  on  account  of  contributions  to  reli- 
gious, educational  or  benevolent  institutions,  to  residents  only.  Para- 
graph 2,  dealing  with  the  interest  deduction,  is  an  application  of  the 
suggestion  of  the  National  Tax  Association  committee  to  the  effect  that 
the  interest  deduction  be  proportionate  to  the  ratio  of  taxable  to  total  in- 
come. In  other  words,  if  there  were  a  large  proportion  of  income  from 
tax-free  investments,  it  would  not  be  proper  to  allow  all  of  the  interest 
paid  on  debts  as  a  deduction,  but,  rather,  a  proportionate  amount  accord- 
ing to  the  amount  of  exempt  income  originally  deducted.  The  phrasing  of 


109 


this  paragraph  is  tmfortunate  for  it  contains  two  unknown  factors,  each 
dependent  upon  the  other.    The  original  wording  conveys  the  idea:  , 

"The  same  proportion  of  interest  paid  or  accrued  within  the  year  on  in- 
debtedness which  the  amount  of  such  gross  income,  as  here  defined,  bears  to  llie 
gross  amount  of  the  income  from  all  sources  within  and  without  the  state." 

Paragraph  3  permits  a  deduction  of  taxes  other  than  income  taxes 
imposed  by  the  United  States  or  any  other  state  or  taxing  sub-division. 
The  question  of  the  propriety  of  this  deduction  is  in  some  reflects  a 
moot  point  From  the  revenue  standpoint,  the  experience  of  Connecti- 
cut shows  rather  clearly  that  it  is  inexpedient  to  allow  the  deduction. 
A  similar  case  may  be  made  also  from  the  standpoint  of  administration. 
By  the  logic  of  the  case,  either  all  taxes  or  no  taxes  except  special  as- 
sessments should  be  allowed  as  deductions;  but  from  the  accounting 
viewpoint  it  is  probably  better  to  permit  the  deduction  of  taxes  in  the 
determination  of  final  or  clear  net  income.  -  If  we  accept  the  meaning 
of  net  income  to  be  the  amount  which  the  owner  of  capital  may  use 
freely  at  his  discretion  without  suffering  impairment  of  his  capital,  then 
the  tax  is  clearly  a  deductible  item.  But  against  the  logic  of  the  case  » 
stands  the  extensive  federal  encroachment  upon  the  revenue  resources 
of  the  states  and  locaUties,  which  the  deduction  involves,  and  the  {M^sent 
provision  probably  represents  the  wise  compromise. 

Moreover,  it  should  be  noted  that  we  are  here  discussing  the  terms 
of  a  personal  income  tax.  A  tax  in  general  is  a  levy  upon  the  income 
or  wealth  of  the  citizen,  and  there  is  no  place  in  the  concept  of  a  tax  for 
a  guaranteed  amount  of  income  outside  of*  or  over  and  above,  taxes.  If 
the  tax  cuts  into  income  so  heavily  as  to  compel  sacrifices,  then  the  in- 
dividual must  face  the  alternative  of  bearing  this  sacrifice  or  of  using 
his  capital,  if  he  cannot  evade  or  shift  the  burden.  We  are  seeking  the 
true  measure  of  capacity,  and  for  the  individual,  on  his  personal  in- 
come, the  true  measure  of  tax-paying  ability  or  obligation  is  his  net 
income  without  the  deduction  of  a  part  of  the  burden,  the  basis  for  the 
measure  of  which  we  are  here  seeking.  With  regard  to  the  business 
concern  as  a  unit,  the  question  becomes  somewhat  more  serious,  and  the 
argument  takes  a  different  turn,  if  the  total  tax  burden  so  cuts  into 
earnings  as  to  discourage  further  investment  of  capital.  If  it  were  pos- 
sible to  distinguish  clearly  between  the  economic  enterprises  of  men  and 
their  personal  affairs  of  other  sorts,  it  might  be  possible  to  permit  such 
a  deduction  in  the  one  ca?e  but  not  in  the  other.  That  is,  it  might  be 
feasible  to  deduct  taxes  from  business  income  but  not  from  personal 
income ;  but  this  line  is  impossible  of  discernment  and  wc  are  effectii^ 
a  "Scotch"  compromise  by  allowing  no  deduction. 


no 


Section  361.  This  section  relates  to  the  items  not  deductible  and 
is  identical  with  federal  section  215. 

Section  362.  The  es^emptions  to  individuals  in  paragraphs  i  and 
2  are  taken  from  federal  section  216.  They  are  allowed  to  residents. 
Taxpayers  receiving  compensation  from  the  United  States  as  employes 
or  officials,  are  entitled  only  to  such  part  of  the  personal  exemptioji  as  is 
in  excess  of  such  compensation. 

Section  ^3.  This  section  provides  a  credit  to  non-residents  on 
account  of  income  taxes  levied  by  any  other  state  or  country,  provided 
tfiat  the  other  state  or  country  allows  a  substantially  similar  credit  to 
residents  of  New  York  subject  to  taxation  under  such  laws. 

This  provision  illustrates  once  more  the  difficulties  which  arise  in 
the  tastation  of  the  income  of  non-residents.  For  example,  the  Massa- 
chusetts tax  is  levied  on  the  income  of  residents  only,  and  the  allowance 
of  a  credit  to  residents  of  other  states  does  not  arise.  But  residents  of 
Massachusetts  are  in  some  cases  affected  by  the  New  York  law,  and  have 
asked  to  be  allowed  the  taxes  paid  in  Massachusetts.  The  basis  for  this 
claim  was  the  contention  that  no  tax  at  all  in  Massachusetts  upon  citi- 
zens of  New  York  was  even  better  than  a  substantially  similar  credit. 
The  argument  was  admittedly  specious,  but  since  the  cases  would  prob- 
ably always  have  been  few  in  number,  the  point  might  have  been  granted 
had  it  not  been  for  the  fact  that  citizens  of  New  Jersey  must,  of  neces- 
sity, have  been  allowed  a  similar  credit  on  similar  grounds.  Certain 
residents  of  Massachusetts  are,  therefore,  made  subject  to  double  taxa- 
tion on  their  income  by  the  New  York  tax  on  non-residents. 

Secticm  364.  The  greater  part  of  this  section  is  taken  from  federal 
section  219.  In  addition,  the  section  provides  that  taxpayers  may  be 
called  upon  for  a  statement  of  the  gross  receipts  and  the  net  profits  of 
the  partnership. 

Section  365.  The  section  dealing  with  estates  and  trusts  is  identi- 
cal with  the  federal  section  on  this  subject  (219)  except  for  certain 
provisions  relating  to  estates  created  by  non-residents,  and  the  treatment 
of  non-resident  beneficiaries. 

Section  366.  This  section  is  a  necessary  part  of  the  plan  for  taxing 
non-residents.  It  requires  withholding  agents  to  return  information 
concerning  all  persons  on  whose  behalf  they  are  required  to  make  deduc- 
tions on  account  of  the  tax.  The  section  .contains  an  error  Jn  specify- 
ing a  deduction  of  2%,  whereas  the  act  imposes  a  graduated  tax  of 
1%  to  3%  (330-  Judge  Knox  referred  to  this  disrepancy,  which 
had  been  corrected  by  administrative  ruling,  but  did  not  regard  it  as 
material  to  the  issue  in  the  case. 


Sections  367-371.  These  sections  relate  to  the  filing  of  returns  and 
the  adjustment  to  the  taxpayer's  accounting  period.  They  require  no 
particular  comment. 

Sections  372-374.  These  sections  confer  the  administration  of  the 
act  upon  the  comptroller  of  state.  The  original  draft  placed  this  ad- 
ministration in  the  hands  of  the  state  tax  commission.  As  noted  above, 
this  change  was  made  at  the  close  of  the  session  for  political  reasons. 
It  is  the  general  judgment  in  New  York  that  the  transfer  was  unwise 
from  every  standpoint^  The  present  comptroller  is  personally  opposed 
to  the  income  tax,  and  appeared  against  the  bill  at  the  hearings.  No 
brief  was  filed  by  his  department  in  the  test  case  before  Judge  KmsK. 
The  state  tax  commission  has  charge  of  the  tax  on  the  incomes  of  corpo- 
rations, and  has  general  supervision  of  all  matters  of  taxation  in  the 
state.  It  is  the  logical  body  for  the  administration  of  this  law,  and 
should  be  left  free  from  all  partisan  or  other  undesirable  influences  in 
this  task. 

Section  375.  The  appeal  body  referred  to  in  this  section  is  the  state 
supreme  court.  It  is  unlikely  that  appeals  will  be  taken  with  any  free- 
dom by  the  smaller  taxpayers,  tmder  this  section.   Greater  freedom  of 

review  should  be  provided. 

Section  376.  Adequate  penalties  are  provided  for  failure  to  make 
a  return,  and  for  a  false  or  fraudulent  return.  It  is  rather  important 
that  a  tax  law  have  "teeth"  in  it.  Effective  penalties  go  far  to  create 
respect  for  the  provisions  of  the  law,  and  a  new  law  which  has  as  an 
object  greater  degree  of  justice  in  the  distribution  of  tax  burden  should 
not  make  evasion  profitable  by  too  light  penalties. 

Section  377.  This  section  follows  the  federal  practice  of  requiring 
pa3rment  of  the  tax  with  the  return,  with  provision  for  a  final  settle- 
ment after  audit.  The  alternative  practice  is  illustrated  in  Wisconsin 
and  Massachusetts.  The  principal  argument  in  favor  of  the  latter  method 
is  the  greater  convenience  of  the  taxpayer,  a  point  which  constitutes  an- 
other of  Adam  Smith's  canons  of  justice  in  taxation.  The  low  personal 
exemption  which  will  probably  be  adopted  in  a  state  income  tax  means 
that  a  large  number  of  persons  will  become  liable  to  income  tax  who 
do  not  ordinarily  have  a  bank  account.  These  persons  will  be  obliged 
to  remit  to  the  state  by  means  of  money  order,  draft  or  in  cash.  There 
will  be  additional  expense  and  inconvenience  to  these  taxpayers,  and  a 
possibility  of  some  loss  if  cash  is  remitted.  Payment  to  the  local  tax 
collectors  avoids  what  might  become  a  source  of  friction  and  complaint 
against  the  law. 

Sections  378-381.  Various  administrative  provisions  relating  to 
cdlection  and  recovery  of  taxes. 


iia 

Section  382.  This  section  provides  a  method  of  distribution.  The 
comptroller  is  required  to  maintain  on  hand  at  all  times  a  fund  of  $250,- 
000,  out  of  which  refunds  to  taxpayers  are  to  be  made.  Of  the  re- 
mainder, 50%  is  to  be  paid  to  the  state  treasurer  to  the  credit  of  the 
general  fund.  The  remainder  is  to  be  distributed  to  the  counties  pro- 
porticxially  to  the  assessed  valuation  of  real  estate.  A  further  intra* 
county  distribution  is  to  be  made  by  the  county  treasurer  on  the  same 
basis. 

The  defect  in  this  plan  of  distribution  is  that  it  will  fail  of  bene- 
ficial effect  upon  the  local  assessment  of  personal  property.  The  Massa- 
chusetts plan  was  framed  with  the  deliberate  intention  of  producing  a 
better  assessment  of  the  perscHial  property  which  will  remain  subject  to 
local  taxaticm.  Tangible  pers<mality  remains  taxable  in  New  York,  and 
its  proper  assessment  has  long  been  a  problem  there.  The  exclusion  of 
this  class  of  taxable  property  in  determining  the  basis  of  distribution 
leaves  the  local  assessor  with  no  greater  incentive  for  improvement  than 
he  had  before. 

Sections  383-385.  Some  final  administrative  provisions  arc  added; 
secrecy  is  imposed  upon  all  c^ials  with  regard  to  the  contents  of  re- 
turns,  and  contracts  to  assume  the  tax  are  made  vaid.  The  sum  of  $300,- 
000  is  appropriated  for  the  administration  of  the  law. 

This  amount  for  administrative  cost  may  appear  large,  but  it  will  be 
a  small  proportion  of  the  tax  assessed.  It  has  been  the  general  experience 
thatt  the  administration  of  an  income  tax  costs  a  large  amount,  abso- 
lutely, but  that  the  relative  cost  is  small.  Successful  administration  here 
will  depend  upon  sufficient  liberality  in  the  appropriation  to  permit  the 
emp]o3rment  of  capable  administrators. 

No  assessment  of  income  has  been  made  under  the  personal  income 
tax  law  in  New  York  and  the  yield  of  the  tax  is  therefore  conjectural.  Va- 
rious estimates  were  made  for  the  legislative  committee,  on  the  basis  of 
the  returns  to  the  federal  revenue  department,  and  other  statistics  of  pop- 
ulatioa  and  income.  Professor  Seligman  estimated  that  a  rate  of  1% 
would  yield  $20,000,000  to  $25,000,000  for  the  state,  of  which  almost 
9/10  would  come  from  New  York  City.  A  more  conservative  estimate 
prepared  for  the  special  tax  committee  of  the  Advisory  Council  of  Real 
Estate  Interests  placed  the  return  at  $12,000,000-$  13,000.000  at  a  \% 
rate.  The  uncertainty  of  estimates  is  increased  just  now  by  the  difficulty 
of  projecting  post-war  incomes  from  the  inflated  figures  of  the  war 
period.  It  seems  reasonaMe  to  expect,,  in  view  of  the  experience  of 
both  Wisconsin  and  Massachusetts,  that  Professor  Seligman's  estimate 
will  not  prove  to  be  seriously  in  error,  and  that  the  return  may  be  at 
least  $20,000,000  with  a  rate  of  1%. 


"3 


The  New  York  FranduM  Tax  on  Business  Corporations. 

Additional  copies  of  this  act  are  not  Available,  and  the  principal 
features  of  the  law  will  be  summarized. 

The  tax  is  imposed  for  the  privilege  of  doing  business  within  the 
.  state,  and  is  levied  upon  the  entire  net  income,  which  is  declared  to  be 
presumably  the  same  as  the  entire  net  income  upon  which  a  tax  is  paid 
to  the  United  States  under  the  federal  revenue  act.  A  report  must  be 
made  to  the  state  tax  commission  within  30  days  .after  making  the  fed- 
eral report  for  the  fiscal  year  ending  in  each  calendar  year,  showing  the 
amount  of  net  income  returned  and  a  mass  of  other  data  specified  by 
the  act.  The  state  tax  commission  is  authorized  to  correct  this  return, 
and  all  changes  made  or  allowed  by  the  federal  officials  must  be  reported 
to  the  state.  The  rate  is  4J^%,  advanced  from  3%  in  the  original  law- 
A  minimum  tax  of  not  less  than  $10  or  not  less  than  one  mill  on  each 
dollar  of  capital  stock  apportioned  to  the  state  was  added  in  1919.  to 
cover  the  cases  in  which  no  net  income  was  shown  in  the  report.  The 
apportionment  of  capital  stock  was  to  be  on  the  basis  of  the  real  estate 
and  tangible  personalty  within  and  without  the  state.  If  the  corporation 
had  stock  without  par  value  the  paid-in  capital  was  to  be  allocated  on  the 
same  basis. 

A  considerable  list  of  exempt  classes  occurs,  including  corporations 
wholly  engaged  in  the  purchase,  sale  and  holding  of  real  estate  for  them- 
selves, securities  holding  companies,  the  public  service  corporations,  sav- 
ings banks,  title  guarantee,  insurance  and  surety  companies.  In  each  of 
these  cases  the  existing  system  of  taxation  was  considered  to  impose  a 
sufficient  burden  to  justify  the  exemption  Jrom  the  operation- of  this  act. 
The  principal  classes  of  companies  subject  to  the  act  arc  the  miscellan- 
eous manufacturing,  mercantile  and  other  business  corporations. 

The  administration  of  the  law  is  in  the  hands  of  the  state  tax 
commission,  and  all  of  the  testimony  which  came  to  the  writer,  from 
various  sources,  was  to  the  eflfect  that  it  was  very  satisfactorily  handled. 
Adequate  powers  are  given  the  commission  to  secure  returns,  10  revise 
and  correct  them,  and  to  perform  the  various  duties  incident  to  the 
proper  administration  of  the  law.  The  commission  certifies  the  amount 
of  tax  due  to  the  state  comptroller,  togctfier  with  the  amounts  due 
various  localities  under  the  distribution  plan,  and  collection  and  distri- 
bution are  carried  on  by  the  latter. 

The  provisions  relating  to  the  apportionment  of  income  to  the 
state  and  distribution  of  proceeds  to  the  localities  are  quite  complicated, 
and  undoubtedly  increase  the  burden  of  administration.  They  will  be 
given  in  the  language  of  the  statute.  The  ^Jportioomoit  sectkm  is  in 
part  as  follows: 


114 

'The  proportion  of  the  entire  net  income  of  the  corporation  upon  which  the 
tax  under  this  arfide  shall  he  based,  shall  be  such  proportion  of  the  entire  net 
income  as  the  aggregate  of 

1)  The  average  monthly  value  of  the  real  property  and  tangible  personal 

property  within  the  state. 

2)  The  average  monthly  value  of  bills  and  accounts  receivable  for  (a)  per- 

sonal property  sold  by  the  corporation  from  merchandise  manu- 
factured by  it  within  this  state;  (b)  personal  property  sold  by  the 
corporation  from  merchandise  owned  by  it  and  located  within  the 
state  at  the  time  of  acceptance  of  the  order  but  not  manufactured 
by  it  within  this  state;  and  (c)  services  performed  within  this  state, 
excluding  bills  and  accounts  receivable  arising  from  sales  made  from 
a  stock  of  merchandise  or  other  property  located  at  a  place  of 
business  maintained  by  the  reporting  corporation  within  this  state. 

3)  The  proportion  of  the  average  value  of  the  stocks  of  other  corporations 

owned  by  the  corporation,  allocated  to  the  state  as  provided  by  this 
section,  but  not  exceeding  10%  of  the  real  and  tangible  property 
segregated  to  this  state  under  this  article, 
bears  to  the  aggregate  of 

4)  The  average  monthly  value  of  all  the  real  estate  and  personal  property 

of  the  corporation,  wherever  located. 

5)  The  average  total  value  of  bills  and  accounts  receivable,  for  (a)  per- 

sonal property  sold  by  the  corporation  from  merchandise  manufac- 
tured by  it  within  and  without  this  state;  (b)  personal  property  sold 
by  the  corporation  from  merchandise  owned  by  it  at  the  time  of  the 
acceptance  of  the  order  but  not  manufactured  by  it;  and  (c)  services 
performed  both  within  and  without  this  state,  based  on  orders  re- 
ceived at  offices  maintained  by  the  corporation,  excluding  bills  and 
accounts  receivable  on  orders  filled  from  a  stock  of  merchandise,  or 
other  property  maintained  by  the  corporation. 

6)  The  average  total  value  of  stocks  of  other  corporations  owned  by  the 

corporation,  but  not  exceeding  10%  of  the  aggregate  real  estate  and 
tangible  personal  property  set  up  in  this  report 

Real  property  and  tangible  personal  property  shall  be  taken  at  its  actual 
value  where  located.  The  value  of  share  sto  k  of  another  corporation  owned  by 
a  corporation  liable  hereunder  shall  for  purposes  of  allocation  of  assets  be  ap- 
portioned in  and  out  of  the  state  in  accordance  with  the  value  of  the  physical 
property  in  and  out  of  the  state  representing  such  share  stock. 

These  elaborate  provisions  are  almost  beyond  the  comprehension  of 
the  lay  mind,  and  it  would  be  impossible  to  judge  of  their  effects  without 
intimate  knowledge  of  the  character  of  the  business  operations  to  be  af- 
fected by  them.  They  are  perhaps  unnecessarily  complicated,  an  das  the 
complexity  of  the  law  grows,  so  multiply  also  the  opportunity  for  the  ad- 
justment of  returns  to  ^  more  favorable  basis.  The  tax  commission  re- 
ports that  the  provision  is  difficult  of  administration,  and  that  it  is  not 
entirely  equitable.  It  is  certainly  too  elaborate  and  too  much  of  an  at- 
tempt to  deal  with  various  local  factors,  to  be  of  great  assistance  as  a 
model  for  Ohio. 


_  The  disposition  of  the  revenue  must  be  taken  in  connection  with  the 
withdrawal  of  aU  corporate  personal  property  from  local  taxation,  which 
the  act  provides.  In  this  respect  it  goes  farther  than  the  personal  in- 
come tax  law,  which  exempts  only  intangibles,  but  as  an  oflfset  the  cor- 
porations pay  a  higher  rate  on  net  incomes.  The  distribution  was 
planned  so  as  to  return  for  local  use  about  as  much  revenue  as  the 
localities  had  formerly  been  receiving  from  the  taxation  of  corporations. 
Accordm^y,  two-thirds  of  the  proceeds  are  to  be  paid  into  the  state 
treasury  for  general  uses,  and  one-third  is  distributed  locally  on  the 
basis  of  the  average  monthly  value  of  the  corporate  tangible  personal 
property  ,n  the  var.ous  cities  and  towns.    If  any  part  of  this  J«X)erty 

located  m  a  vdlage  the  village  and  the  town  sha«  in  the 
hat  the  axes  raised  by  the  village  for  village  and  town  putpos^bears 
o  the  total  of  such  taxes  raised  by  town  and  village  for  to^nd^" 
lage  purposes.  The  state  tax  commission  made  investigations  which 
served  as  the  basis  for  this  very  complicated  plan.  In  view  of  the 
highly  misatisfactory  character  of  the  local  assessment  of  corporate 
tangibles  mider  the  old  system  the  degree  of  accuracy  with  which  the 
results  of  this  plan  w.Il  co-i„cidc  with  the  earlier  n^t.is  higMy  un! 
oertam.  Such  a  plan  was  designed  to  meet  certain  purely  lo<^  Edi- 
tions and  IS  of  purely  local  interest  /  conai 

Hm  WisooBHii  Income  Tax  Lew. 

The  Wisconsin  income  tax  is  a  general  or  comprehensive  tax  in 

bu  .t  .s  a  hm.ted  tax  .n  another  sense,  in  that  it  applies  only  to  tacomes 
derived  from  sources  within  the  state.  Geographical  location  oTShe 
source  of  income  rather  than  the  personal  or  political  obHgaSi  of  he 
taxpayer  determines  liability  to  the  tax.  ' 

Inamie  is  defined  to  include  all  rents,  dividends,  interest  wa«s 
p«>fits  denved  from  the  sale  of  real  estate  or  other  cap  tal  asS  3-' 

whiter  sTrf  Tl  "^-^er  gains,  profit,  a«l  t^^^f 

whatever  sorf.    The  or.gmal  law  included  the  estimated  rental  of  dwell- 
ings when  occupied  by  the  owner,  but  this  proved  so  fruitful  of  admt- 
strative  difficulties  and  so  barren  of  results  that  it  was  eliminated  Tn 

to  J  *  X  in  this  year  also, 

to  a  distribution  of  earnings  accrued  since  January  i  iqu  and  nliH 
J^^the  stockholder,  whether  in  cash  or  in  stocl!.  I„ 
froin  the  sa  e  of  capital  assets  acquired  before  January  i.  loii  the  fair 
market  value  as  of  that  date  was  fixed  as  the  basis!^  Rerfd^ts  Vere 
made  taxable  only  on  incomes  earned  or  derived  from  property  located 
withm  the  state,  and  non-residents  were  to  be  taxed  sinAlarly  on  ln- 


ii6 

comes  arising  within  the  state.  A  system  of  apportionment  for  inter- 
state incomes  was  provided.  The  geographical  rule  was  modified  by 
the  familiar  legal  doctrine  of  situs.  The  act  provided  that  the  income 
af  real  estate,  farm,  mine  or  quarry,  should  be  taxable  at  the  situs  of 
the  producii^  property.  The  income  from  intangibles,  specifically  land 
omtracts,  mortgages,  stocks,  bonds  and  securities,  is  to  f  o^ow  the  domi- 
cile of  the  owner  for  taxation  purposes.  Income  received  from  non- 
residents from  these  species  of  property  is  not  taxable,  even  though  the 
property  which  they  represent  and  from  which  they  derive  their  value, 
is  located  in  Wisconsin.  For  interstate  concerns  a  statutory  rule  of 
apportionment  of  income  is  provided,  or  a  separate  accounting  may  be 
made,  with  the  approval  of  the  commission. 

This  view  of  the  taxability  of  incomes  is  not  in  accord  with  the 
best  modern  thought,  as  represented  by  the  plan  for  a  model  system  of 
state  and  local  taxation.  It  conflicts  with  the  New  York  and  other 
laws,  and  if  retained,  will  undoubtedly  lead  to  an  increasing  measure 
of  double  taxation  on  non-residents.  The  tax  commission  is  urging  that 
Ae  law  be  harmonied  with  other  laws  by  making  domicile  or  residence 
the  test  of  taxability.* 

The  method  of  apportioning  the  incomes  of  firms  or  individuals 
doing  business  within  and  without  the  state  is  apparently  designed  pri- 
marily for  manufacturing  corporations,  and  it  is  primarily  this  dass 
of  concerns  which  would  be  involved.    This  method  is  as  follows: 

"In  determiniiig  the  proiK>rtioii  of  capital  stock  employed  in  the  state,  the 
same  shall  be  computed  by  taking  the  gross  business  in  dollars  of  the  corporation 
in  the  state  and  add(ing)  to  same  to  the  full  value  in  dollars  of  the  property  of 
the  corporation  located  in  the  state.  The  sum  so  obtained  shall  be  the  numerator 
of  a  fraction  of  which  the  denominator  shall  consist  of  the  total  gross  business  in 
dollars  of  the  corporation,  both  within  and  without  the  state,  added  to  the  full 
value  in  dollars  of  the  entire  property  of  the  corporation,  both  within  and  without 
the  state.  The  fraction  so  obtained  shall  rqiresent  the  propoitkm  of  the  capital 
slodc  represented  within  the  state." 

Much  difficulty  has  been  met  under  this  rule  in  securing  a  fair  ap- 
portionment to  Wisconsin  of  the  income  of.  the  large  creameries  and 
canneries  which  buy  their  raw  materials  in  Wisconsin  and  sell  most  of 

the  product  in  other  states.  The  Heintz  Company  is  now  engaged  in 
contesting  the  validity  of  the  commission's  determination. 

Since  the  law  apphes  both  to  individuals  and  to  corporations  it  is 
necessary  to  provide  separate  provisions  for  deductions  from  gross  in- 
come, exemptions  and  rates.    The  act  in  reality  combines  in  one  law  a 


^Wisconsin  Tax  Commission,  Report,  1918,  pp.  6-a 


117 


system  of  taxation  similar  to  that  of  New  York.  That  is,  it  is  a  com- 
bination of  tax  on  personal  incomes  and  a  business  tax  on  corporations, 
using  net  income  as  the  basis  in  the  latter  case.  Viewed  ifi  this  light, 
the  Wisconsin  plan  foreshadowed  the  general  outline  of  the  Model  Sys- 
tem, although  with  some  features  not  acceptable  to  the  latter. 

In  determining  the  net  income  of  individuals  the  following  deduc- 
tions are  allowed,  i)  wages  and  salaries  paid  to  employes  who  have  as- 
sisted in  producing  the  income.  In  order  to  secure  this  deduction 
employers  must  supply  a  list  of  all  persons  to  whom  $700  or  more  is 
paid  annually.  Other  allowances  are,  2)  the  ordinary  and  necessary  ex- 
penses ;  3)  losses  not  covered  by  insurance ;  4)  dividends  on  stocks  of  cor- 
porations the  income  of  which  is  taxable  under  the  act;  (with  provision 
for  partial  deduction  in  case  only  a  part  of  the  corporate  income  is  tax- 
able) ;  5)  interest  on  all  debts,  providing  the  debtor  reports  amounts  paid, 
form  of  the  debt  and  names  of  creditors ;  6)  pensions ;  7)  all  taxes  paid 
on  the  property  or  business  from  which  the  income  is  derived;  8)  inherit- 
ances; 9)  insurance  received,  except  in  the  case  of  endowment  paid  dur- 
ing life  the  excess  of  payment  over  amounts  paid  for  the  insurance  is 
taxable  as  a  prc^t ;  10)  and  dividends  paid  on  stocks  of  banks  taxable 
by  Wisconsin. 

The  interest  exemption  is  clearly  too  broad,  and  the  commission 
favors  a  restriction  to  the  interest  paid  on  debts  incurred  in  the  opera- 
tions from  which  the  taxable  income  is  derived.  The  language  of  the 
act  does  not  permit  a  deduction  of  federal  income  taxes,  which  were  not 
in  existence  when  the  law  was  passed.  The  commissicm  recognizes  two 
sides  to  this  question  but  is  inclined  to  favor  the  deduction.  The  attempt 
to  determine  and  tax  the  so-called  "profit"  element  in  endowment  or 
other  term  insurance  is  peculiar  to  the  Wisconsin  statute.  The  difficulty 
of  accurate  and  equitable  determination  of  this  element  makes  this  an 
objectionable  feature. 

The  exemptions  allowed  to  individuals  are  $800  for  single  persons, 
$1,200  for  husband  and  wife,  $200  for  each  child  under  18,  and  $200  for 
each  additional  person  actually  supported  by  and  entirely  dependent  upon 
the  taxpayer  for  snupport.  These  exemptions  allowed  to '  individuals 
stand  as  originally  enacted  and  are  reminiscent  of  the  figures  commonly 
advanced  about  191 1  as  representing  the  minimum  of  decent  subsisten<^. 
They  are  unquestionably  too  low  for  the  present  era  of  inflated  prices! 
These  exemptions  are  specifically  denied  to  non-residents  on  their  income 
from  sources  within  the  state,  and  to  corporations. 

The  rates  on  personal  incomes  are  graduated  accordmg  to  the  follow- 
ing elaborate  schedule : 


ii8 

Taxable  Taxable 
Class    Income  Rate      Class    Income  Rate 

1st  $1,000   1  %  8th  $1,000   3i% 

2nd  1,000.'..   1\%  0th    1,000.....   4  % 

3rd  1,000   U%  10th    1,000   4i% 

4th  1,000   15%  11th    1,000   5  % 

5th  1,000    2  %  12th    1,000    51% 

6th  1,000   2i%  13th   1,000   6  % 

7th  1,000   3  %  And  on  all  over   6^ 

The  deductions  allowed  to  corporations  include  wages  and  salaries 
paid,  provided  a  list  of  employes  receiving  $700  and  over  be  filed  as  in 
the  case  of  individuals ;  losses  not  covered  by  insurance ;  taxes  imposed 
by  any  state  upon  the  source  from  which  the  income  taxed  by  this  act 
is  derived;  ordinary  expenses,  with  reasonable  allowance  for  use,  wear 
and  tear,  and  the  depletion  of  mines ;  interest  paid  in  the  operation  of  the 
bfusiness  from  which  the  income  is  derived,  provided  a  list  of  pa3rments 
be  filed  as  in  the  case  of  individuals;  dividends  from  corporations,  the 
income  of  which  is  taxed,  with  a  proviso  for  the  apportionment  of  this 
deduction  according  as  only  a  part  of  the  said  income  is  taxable ;  bank 
dividends ;  and  co-operative  associations  may  deduct  amounts  distributed 
to  patrons  in  proportion  to  their  patronage. 

The  corporations  that  are  taxable  are  allowed  no  exemptions.  All 
public  funds  and  the  income  of  the  following  classes  of  corporations  are 
entirely  exempted  —  banks,  religious,  educational,  scientific  and  benevo- 
lent institutions,  and  the  public  utilities. 

The  law  originally  contained  a  very  complicated  scheme  of  rates  on 
corporation  incomes,  the  actual  rate  being  governed  by  the  relation  be- 
tween net  income  and  the  assessed  valuation  of  the  property  in  Wis- 
consin. The. thought  was  to  stimulate  the  local  assessment  of  corporate 
prc^rty  and  thus  to  provide  a  revenue  resource  in  the  event  that  the 
inccHne  tax  receipts  should  prove  disappointing.  The  plan  proved  im- 
practicable and  was  replaced  in  191 3  by  a  straightforward  graduated  sys- 
tem, the  schedule  running  as  follows :  . 

Taxable  Taxable 
Class    Income  Rate     Class    Income  Rate 

1st  11.000   2  %  5th  $1,000...   4  % 

2nd  1,000   2J%  6th   1,000   5  % 

3rd  1,000   8  %  7th  and  all  above   6  % 

4th   1,000   31% 


The  administrative  provisions  of  the  act  are  in  many  respects  the 
most  important  contribution  which  Wisconsin  has  made  to  the  whole 
problem  of  state  income  taxation.   These,  more  than  any  other  feature. 


119 


distinguish  the  Wisconsin  act  from  the  long  list  of  failures  which  pre- 
ceded it.  They  have  served  as  the  model  for  the  administrative  portions 
of  the  Massachusetts  and  New  York  laws,  and  it  is  hardly  too  much  to 
say  that  the  degree  of  success  or  failure  which  will  attend  such  a  law 
in  any  other  state  will  depend  upon  the  extent  to  which  the  administrative 
principles  contained  in  this  act  are  observed. 

The  tax  commission  is  in  general  charge  of  the  income  tax.  It  is 
required  to  divide  the  state  into  assessment  districts  and  to  appoint  an 
income  tax  assessor  for  each  district.  These  assessors  are  in  fact 
chosen  under  civil  service  rules,  as  are  all  deputies  and  assistants  who 
may  prove  necessary.  Their  salaries  are  fixed  by  the  commission,  but 
are  not  to  exceed  fiye  cents  on  each  $1000  of  assessed  valuation  as 
equalized  by  the  tax  commission  in  the  previous  year.  The  county  board 
of  each  county  in  which  an  office  is  established  is  required  to  provide 
suitable  quarters. 

The  assessors  of  incomes  assess  all  individuals  upon  their  incomes 
and  for  each  unanswered  question  the  assessor  or  his  deputy  is  subject  to  a 
penalty  of  $5.00  unless  satisfactory  cause  can  be  shown  to  the  commis- 
sion. They  are  required  to  assist  the  county  clerk  in  the  comi^utation  of 
the  taxes  due  front  individuals,  and  in  addition  to  their  duties  in  con- 
nection with  the  assessment  of  incomes,  they  are  required  to  act  as  super- 
visors of  assessment.  In  this  capacity  they  have  general  charge  of  the 
local  assessment  of  property.  They  work  with  the  local  assessors,  inspect 
and  check  up  their  work,  search  out  omitted  property,  and  exercise 
general  supervision  over  the  assessment  process. 

Corporations  make  the  return  of  theirjncomes  to  the  state  tax  com- 
mission and  are  assessed  by  that  body.  The  tax  as  computed  is  certified 
to  the  county  clerks  of  the  counties  in  which  the  offices  of  the  corporations 
are  located. 

Individuals  who  are  aggrieved  by  the  assessment  of  their  income 
may  appeal  to  a  county  board  consisting  of  three  resident  taxpayers  in 
each  county,  appointed  by  the  state  tax  commission.  These  boards  may 
review  and  correct  the  assessment,  and  a  further  appeal  may  be  taken 
to  the  tax  commission,  sitting  as  a  board  of  appeals  on  their  own  original 
assessments.   Corporations  may  appeal  directly  to  the  commission. 

The  method  of  collection  is  unique,  but  it  is  of  considerable  interest 
to  Ohio  because  of  the  constitutional  provision  for  distribution  in  this 
state.  All  income  taxes,  on  both  personal  and  corporate  incomes,  are 
certified  to  the  local  treasurers  and  are  extended  upon  the  local  tax  rolls 
to  a  special  column,  and  are  collected  at  the  same  time  and  in  the  same 
manner  as  are  all  other  taxes.  Each  taxpayer  is  required  to  give  his 
post  office  address,  and  if  he  has  income  which  would  have  a  situs  for 


120 


taxation  in  another  district,  is  required  to  indicate  its  location.  Business 
concerns  doing  business  in  more  than  assessment  district  are  to  use  the 
same  rule  of  apportionment  between  districts  as  is  used  by  interstate 
concerns.  Of  the  collections  the  local  treasurers  certify  io%  to  the 
state,  20%  to  the  county,  and  70%  to  the  town,  village  or  city  in  which 
the  tax-  was  assessed,  levied  and  collected.  When  the  last-named  share 
exceeds  2%  of  the  equalized  valuation  of  property,  the  excess  shall  be 
paid  to  the  county  to  be  distributed  to  the  towns,  cities  and  villages  ac- 
cording to  school  population.  Cities  of  the  first  class  were  required  to 
begin  the  creation  of  firemen's '  pension  funds  out  of  the  first  receipts, 
setting  aside  each  year  sufficient  to  maintain  the  fund  at  $175,000.  All 
expenses  of  administration  are  paid  by  the  state,  from  the  io%  quota 
alloted  to  it 

There  ranains  one  other  feature  which  may  be  of  especial  interest 
to  Ohio.  This  is  the  offset  of  personal  property.  It  was  introduced  in 
191 1  as  a  compromise,  a  bridge  by  which  the  state  might  pass  from  prop- 
erty to  income  taxation.  It  was  necessary  to  safeguard  the  local 
revenues  while  the  income  tax  was  in  the  experimental  stage;  there  was 
also  a  certain  inclination  to  avoid  double  taxation  of  personal  property, 
e^)eciaUy  of  intangibles,  and  the  perscmal  property  o£Fset  was  devised 
as  a  ccmtromtse.  In  effect,  it  permits  any  taxpayer  to  present  the  tax 
receipts  for  personsd  property  taxes,  except  for  the  tax  on  stocks  in  banks 
and  banking  institutions,  and  secure  a  credit  toward  the  payment  of  his 
income  tax.  This  means  simply  that  the  taxpayer  will  pay  the  larger 
of  the  two  taxes,  an  arrangement  which  exists  in  this  precise  form  in  one 
of  the  Canadian  provinces. 

The  commission  now  recommends  the  removal  of  this  provision.^ 
It  points  out  the  absurdity  of  an  elaborate  mechanism  for  the  assessment 
of  incomes,  only  to  have  this  result  nullified  by  the  presentation  of  per- 
sonal property  tax  receipts.  Further,  the  state  should  either  tax  personal 
property  or  exempt  it  The  present  arrangement  is  an  unfair  discrimina- 
tion against  the  owner  of  real  estate,  since  it  ostensibly  taxes  personalty 
'bifl  in  reality  does  not  do  so,  and  without  granting  specific  exemption. 
Moreover,  the  advantage  to  be  obtained  by  a  lai^e  assessment  of  per- 
sonal property  at  low  local  rates  has  led  to  much  fraud  in  the  classifica- 
tion of  property.  Many  concerns  have  sought  to  pad  their  personalty 
assessments  by  urging  assessors  to  list  fixed  machiner)%  buildings  on 
leased  land,  and  other  forms  of  property  usually  considered  to  be  real 
estate  as  personal  property  in  order  to  increase  the  amount  of  offset 
against  income  tax.  The  best  solution  appears  to  be  that  proposed  by 
the  National  Tax  Association  committee  on  a  model  tax  system-tax 


^Wisconsin  Tax  Commission,  Report,  1918,  pp.  6-8. 


121 


tangibles  at  a  low  fixed  rate,  at  their  situs,  on  account  of  the  burdens  of 
local  governments  and  exempt  intangibles  entirely. 

The  whole  treatment  of  personal  property  by  the  Wisconsin  act  will 
be  of  some  interest  to  us  in  Ohio,  as  will  be  also  the  views  of  the  Wis- 
consin tax  commission  on  this  important  subject.  The  income  tax 
exempted  outright  certain  classes  of  personal  property,  the  proper  assess- 
ment of  which  had  become  almost  impossible,  even  with  improved  meth- 
ods of  administration.  These  exempted  classes  were — moneys  and  credits 
of  all  kinds,  including  stocks  and  bonds ;  household  goods  and  furnish- 
ings; farm,  orchard  and  garden  machinery,  implements  and  toob;  and 
some  other  minor  items.  The  principal  reason  for  this  action  was  the 
intention  of  the  legislature  definitely  to  substitute  income  for  property 
taxation.  Whether  this  intention  were  wise  will  be  discussed  presently; 
but  it  is  true  that  as  affairs  stood  in  Wisconsin  the  attempt  to  tax  the 
more  elusive  forms  of  personal  propery  at  high  local  rates  had  brought 
extra-legal  exemption.  For  example,  moneys  and  credits  were  assessed 
locally  in  1910  at  $22,349,000,  and  this  the  commission  found  to  be$i4.8i% 
of  the  true  value  of  such  property.  For  the  other  forms  of  personal 
property  which  were  exmpted  the  commission  found  the  assessment  of 
1910  to  be  at  17.2%  of  true  value.  At  the  average  state  rate  for  1910 
the  exempted  classes  would  have  paid  $959,000  in  taxes.  The  total 
assessment  of  income  tax  in  1912  was  $3,482,000,  of  which  $1,609,000 
was  paid  by  the  presentation  of  personal  property  tax  receipts. 

The  general  advantage  which  has  been  derived  from  the  use  of 
the  income  tax  may  be  shown  by  the  Mlowing  table  which  the  state  tax 
commission  has  prepared:^ 

EXCESS  OF  INCOME  TAX  OVER  THE  PERSONAL  PROPERTY  TAX 
USED  AS  OFFSET  AND  THE  ESTIMATED  AMOUNT  LOST  BY 
THE  EXEMPTION  OF  CERTAIN  PERSONAL  PROPERTY. 

Income  Tax   Personal  Tax     Est.  Tax  on  Delinquent 
year  Assessed    Used  as  Offset     Exemptions   Income  Tax 

1912   $3,482,000      $1,609,000         $700,000  $241,000 

1913   4,084,000        1,805.000  700,000        .  251.000 

1914    4,145.000        1,987,000      •     700,000  251.000 

1915  :   3,837,000       1,825,000  700,000  105.000 

Totals    $15,549,000      $7,228,000      $2,800,000  $753,000 

Total  income  tax  assessed..  $15,549,000     Personal  tax  offset   $7,228,000 

Total  personal  and  delin-  Est.  tax  on  exemptions   2,800.000 

quent   10,78-2,000     Deliquent    753,000 

Total  excess    $4,767,000     ,  Total   $10,782,000 

Average  excess    1,191,000 

*  Wisconsin  Tax  Commlssipn,  Report,  1916,  p.  68. 


122 


In  commenting  upon  this  table  the  commission  states  that  a  large 
part  of  the  amount  shown  here  as  delinquent  tax  was  really  collected 
later  by  the  county  treasurers,  and  that  in  consequence  the  excess  of 
mcome  tax  over  offsets  should  be  greater  than  is  actually  shown.  The 
published  statistics  for  1918  are  very  meager,  but  some  of  these  items  may 
be  extend  : 

1916  igi^ 

Total  tax  assessed   $5,32^,000  $9,4^2.0'M) 

^^^^^  •   2,211,000  3,307.000 

•   ,  

 :   $3,118,000  $6,175,000 

These  figures  are  indicative  of  the  extent  to  which  war  inflation  has 
overthrown  all  established  price  and  money  standards.  The  total  tax 
assessed  for  1918  was  $11,830,000.  On  the  other  hand  the  personal 
property  tax  offset  reveals  no  surh  elasticity,  even  with  advancing  prices, 
and  the  mar^^  of  excess  has  widened  greatly.  These  figures  suggest 
also  the  remarkable  flexibilty  which  is  characteristic  of  direct  taxation 
in  general  and  of  the  income  tax  in  particular. 

The  tax  commission  has  always  ccmtended  that  the  income  tax  was 
very  inexpensive,  relative  to  the  yield.  It  happens  that  there  are  several 
bases  <»i  which  to  measure  or  compare  the  cost,  and  the  results  are 
affected  by  the  selection.  The  cost  of  the  income  tax  division  relative 
to  tax  assessed  and  cash  collections  are  shown  herewith : 

%  Ket  Cost  to     %  Net  Cost  to 


^  Tax  Assessed  Cask  CoUectioHs 

1^12-13   1.31 

1913-14   1.11  2.33 

1^14-15   1.06  2.20 

191^16   *   1.30  2.32 


The  net  cost  is  obtained  by  subtracting,  in  each  year,  the  cost  of  the 
former  supervisors  of  assessment  from  the  outlay  for  the  income  tax 
division.  These  officials  had  cost  the  state  $54,000  in  1910.  The  assess- 
ors of  incomes  replaced  them  and  are  now  performing  their  duties ;  it  is 
not  improper  to  divide  the  total  expense  in  this  way.  but  it  is  hardly  a 
fair  guide  for  another  state,  for  the  income  tax  would  cost  practically 
as  much  in  Wisconsin  today  if  there  had  never  been  supervisors  of 
assessment.  The  conisensus  of  opinion  in  the  East  was  that  such  a  tax 
would  cost  about  2%  of  the  tax  assessed. 

The  Wisconsin  commission  has  ordinarily  been  very  lavish  in  the 
compilation  and  publication  of  statistics.    From  the  wealth  of  material  the 


123 


following  table  is  selected,  as  the  one  best  suited  to  reveal  the  general 
character  and  distribution  of  the  income  tax.  It  shows  the  income 
assessed,  the  tax  assessed  and  the  per  capita  tax,  for  groups  of  counties  in 
1914  and  1916: 


Year. 

The  State,  Group  I. 

Group  II. 

Group  III. 

1914 

.  100% 

47.12% 

34.51% 

18.37% 

1910 

100 

44.01 

36.03 

19.95 

100% 

42.55% 

26.78% 

30.67% 

1916 

100 

41.42 

35.45 

23.13 

Per  capita  tax   

1914 

$1.77 

$4.50 

$1.84 

$0.68 

1916 

2.29 

5.43 

2.48 

.95 

1007o 

18.36%. 

33.21% 

48.23% 

Group  I  consists  of  one  county,  Milwaukee.  With  only  18.56%  of 
the  population,  it  was  assessed  for  nearly  half  of  the  total  tax  in  1914. 
Group  II  included  16  counties,  containing  cities  of  tht  second  and  third 
classes,  and  Group  III  comprised  the  remaining  54  counties,  the  essenti- 
ally rural  portion  of  the  state.  During  this  period  Milwaukee  county 
lost  slightly  in  the  relative  amount  of  income  assessed,  and  somewhat 
more  heavily  in  the  amount  of  tax ;  but  it  remain  true,  as  the  commis- 
sion has  pointed  out,  that  the  modem  income  tax  is  primarily  and 
characteristically  an  usban  tax.  In  19 14  the  per  capita  levy  in 
Milwaukee  City  was  $4.50  but  in  group  III  it  was  only  .68.  The  commis- 
sion sums  up  its  discussion  of  this  fact  fact  by  saying  that  "a  smaller 
portion  of  the  people  pay,  and  they  pay  lower  average  rates  on  lower 
average  incomes,  in  the  country  than  in  the  city."  This  recalls  Professor 
Seligman's  statement  regarding  the  federal  income  tax  on  persons  of  igicS 
that  about  37%  came  from  New  York  state,  and  87%  of  this  quota 
came  from  New  York  City.  These  results  are  an  inevitable  consequence 
of  the  enormous  concentration  of  wealth  in  the  present  age.'  They 
constitute  a  formidable  argument  against  the  return  of  tfie  whole  of 
the  tax,  or  even  of  any  large  percentage  of  it,  to  the  district  of  source. 
They  would  appear  also  to  refute  the  idea  that  an  income  tax  alone, 
with  complete  exemption  of  personal  property,  is  an  ideal  revenue  system. 
The  cities  would  find  such  an  arrangement  satisfactory  enough  perhaps, 
but  the  rural  sections  would  find  it  more  difficult  to  provide  adequate 
revenues.  It  will  be  to  the  interest  of  the  latter  to  retain  the  property 
tax  on  tangibles,  with  proper  care  in  adjusting  the  rates  through  classi- 
fication. Since  no  state  is  wholly  eitiier  urban  or  rural  the  practical 
working  ideal  becomes  9  suitable  combination  of  income  and  classified 
property  taxes, ' 


124 


The  relatively  greater  revenue  needs  of  the  large  municipalities  arc 
recognized  in  Ohio  in  the  constitutional  provision  which  requires  50% 
of  the  collection  to  be  returned  to  the  source.  But  the  social  obligations 
of  wealth  must  be  recognized  as  well  as  the  state's  obligation  toward 
certain  state-wide  problems.  And  a  considerable  portion  if  not  all  of  the 
remainder  sould  be  distributed  or  used  in  such  a  manner  as  wiU  affect  a 
jomt  discharge  of  these  obligations. 

This  overlong  report  may  be  concluded  with  some  general  observa- 
tions and  conclusions  with  r^rd  to  the  income  tax  and  its  applicability 
tf>  Ohio. 

1)  The  inccmie  tax  is  fiscally  adequate.  Under  proper  conditions 
It  wi:i  produce  probably  more  revenue  for  the  state  as  a  whole  than  it 
is  possible  to  obtain  from  intangibles  under  the  general  property  tax.  We 
may  therefore  confidently  expect  to  add  to  the  state  and  local  revetiues  by 
introducing  such  a  tax.  The  necessary  condition  is  the  adoption  of  such 
a  system  of  property  taxation  as  will  permit  the  exemption  of  intangibles 
and  the  use  of  a  properly  graduated  tax  on  incomes. 

2)  We  know,  too,  from  a  survey  of  the  experience  elsewhere, 
what  the  general  form  of  such  a  tax  should  be.  The  definition  of  gross' 
mcome  and  the  proper  deductions  therefrom,  have  been  quite  satisfac- 
torily developed  by  the  federal  practice  as  well  as  by  some  of  the  states. 
We  are  quite  clear  also  as  to  the  necessary  administrative  organization 
which  must  be  adopted.  The  two  most  difficult  points  in  the  framing  of 
sudi  a  measure  will  be  a  satisfactory  plan  for  the  proper  apportionment 
of  mcimie  to  the  state  and  the  proper  distribution  of  such  portion  as  the 
amstitution  leaves  to  legislative  discretion.  In  Massachusetts  and  New 
York  the  educational  situation  was  apparently  in  greatest  need  of  cor- 
rection, and  such  is  doubtless  the  case  in  Ohio.  In  any  event  it  is  prob- 
ably not  wise  to  return  more  than  the  constitutional  minimum  percentage 
to  the  district  of  source  unless  the  local  needs  compel  such  disposition. 

3)  The  experience  of  other  states  makes  it  clear,  too,  that  the  per- 
sonal income  tax  cannot  stand  alone,  but  must  be  correlated  with  the 
Otficr  parts  of  the  tax  system.  The  final  word  on  this  very  important 
subject  is  the  report  on  the  Model  System,  which  proposes  the 
combination  of  personal  income  cax,  business  tax,  and  local  tax  on 
tangibles.  These  proposals  are  clearly  influencing  the  trend  of  legisla- 
tion in  several  states,  and  in  some  cases  it  is  possible  to  note  appreciate 
progress  in  conforming  at  least  to  the  outlines  of  the  plan.  In  Ohio 
espeoBl  attention  should  be  given  to  the  possibility  of  a  business  tax,  for 
our  n^od  of  taxing  ordinary  business  corporations  is  notoriously  in- 
ailequate.  I  am  assuming  the  exemption  of  intangibles,  though  I  realize 
that  this  is  a  contingent  event,   It  must  be  made  possible,  or  tb^  smes^ 


of  our  income  tax  is  very  uncertain.  If,  in  addition,  we  shou'd  intro- 
duce the  ru'e  of  taxincr  tang^ibles  in  situ,  we  could,  at  a  single  stroke  relieve 
the  municipalities  and  free  a  larger  portion  of  the  proceeds  of  the  income 
tax  for  important  general  uses,  such  as  education. 

We  must  realize,  too,  that  we  are  now  riding  the  wave  of  income 
tax  popularity.  A  few  vears  ago  separation  of  the  sources  of  revenno 
was  our  revenue  pariacea.  Todr.y,  there  is  some  danger  of  placing  too 
great  reliance  upon  the  income  tax  as  the  chief  agent  of  our  fiscal  salva- 
tion. Such  expectations  are  doomed,  and  this  failure  will  react  unfav- 
orabV  against  the  income  tax  in  its  proper  p'ace.  It  is  more  true  today 
than  ever  that  no  one  system  will  prove  a  cure-all.  We  must  diversify 
the  revenue  system,  combine  property  and  income  taxation,  and  sTive 
toward  a  genuine  and  effective  co-ordination  of  the  widely  di-  erse  and 
different  sources  of  revenue.  On  this  point  some  remarks  by  Professor 
,  Bullock  are  worthy  of  consideration.^  . 

"The  foregoing  discussion  leads  to  the  conclusion  that  neither  the  income 
tax  nor  the  classified  property  tax  is  always  and  at  everv  point  to  be  pre^'erred  to 
the  other;  that  these  taxes  are.  to  a  large  extent,  merely  different  methods  of  doing 
tbe  same  thing ;  and  that  they  ought  to  be  regarded  as  imposts,  not  mutually  exclu- 
sive, but  capable  of  being  combined  in  a  logical  and  practicable  scheme  of  taxation. 
In  choosing  between  them  at  any  point,  we  need  to  weigh  all  the  circumstances  of 
the  case  and  then  determine  on  which  side  the  balance  of  advantage  lies.  No  gen- 
eral pronunciamento  in  favor  of  either  tax  will  solve  any  practical  problem  of 
taxation. 

•This  conclusion,  however,  needs  one  qualification.  The  two  taxes  are  not 
equally  well  adapted  to  the  needs  of  every  state.  The  income  tax  works  much 
better  in  manufacturing  and  commercial  communities  than  in  rural,  on  account  of 
the  difficulty  of  computing  farmers*  incomes  and  because  the  high  exemptions 
usually  inseparat>le  from  an  income  tax,  permit  the  average  farmer  to  s'ip  throu^rh 
the  net  and  diminish  greatly  the  revenue  secured.  It  also  involves  a  greater  de- 
parture from  established  ideas  and  practices ;  and  probably  requires,  at  least  when 
first  introduced,  more  skillful  administratk>n.  A  state  that  is  almost  wholly  devoted 
to  agriculture  would,  therefore,  do  well  to  adopt  the  classified  property  tax;  and 
one  that  is  not  prepared  to  centralize  the  machinery  of  assessment  as  Wisconsin 
and  Massachusetts  have  done,  certainly  will  achieve  no  great  success  with  the 
income  tax.  The  last  statement,  however,  is  almost  as  true  of  the  classified  prop- 
erty tax.  as  Iowa's  experience  shows ;  so  that  we  need  alwyas  to  insist  that  a  con- 
siderable degree  of  centralization  is  a  fundamental  reqwsite  in  mof  plan  of  tax 
reform." 

4)  The  importance  of  the  administrative  measures  caiftiot  be  too 
strongly  emphasized.  As  Professor  Bullock  says,  they  are  indispensable 
to  any  plan  of  tax  reform.   A  partizan  truce  should  be  declared  on  this 


*  Proceedings  of  the  National  Tax  Association,  IQlfi, 


126 


subject  and  such  standards  of  selection,  tenure  of  office  and  compensation 
for  the  administrative  staff  should  be  set  up  as  will  cwnmand  the  respect 
and  the  support  of  all  classes  and  all  factions.  The  inauguration  of  an 
income  tax  is  a  gigantic  task  under  the  best  conditions.  The  burden 
should  not  be  unduly  increased. 

5)  It  is  especially  important  and  valuable  that  the  income  tax  law 
should  come  into  effect  with  the  people  favorably  disposed  toward  it. 
This  has  been  appreciated  elsewhere,  and  elaborate  plans  have  been  car- 
ried through  in  order  to  "sell"  the  idea  to  the  public.  To  this  end  it  is 
suggested  that  the  early  draft  of  the  bill  be  given  extensive  publicity 
in  every  possible  way,  and  especially  by  conducting  a  series  of  hearings 
at  different  points  in  the  state.  Hearings  at  Columbus  are  not  enough- 
only  the  specially  interested  people  will  attend.  The  bill  must  be  taken 
to  the  people.  This  educational  campaign  should  be  continued  by  those 
chosen  to  administer  the  law  after  it  is  passed,  but  there  will  be  less 
friction  and  criticism  if  the  objections  are  met  before  the  final  enact- 
ment. 

6)  Finally,  we  must  recognize  that  the  problems  of  taxation,  while 
serious  and  important,  are  not  unrelated  to  the  other  phases  of  public 
finance,  such  as  expenditures,  debts,  and  financial  control.  This  ccMnmittee 
may  not  consider  that  it  now  has  jurisdiction  over  such  questions ;  but  un- 
less they  are  adequately  dealt  iwth,  the  work  of  this  committee  may  result 
simply  in  increasing  the  taxes  without  reducing  the  burden.  The  need 
may  be  stated  succinctly  as  one  of  a  more  adequate  budget  system  for 
the  state  and  the  local  units.  Such  problems  as  control  of  expenditures, 
tax  limits,  and  debt  limits  can  only  be  properly  dealt  with  under  a  budget 
system.  The  Smith  law  may  be  r^rded  as  an  earnest  attempt  to  limit 
expenditures.  But  it  imposes  external,  rigid,  medianically  determined 
limits,  and  as  such  is  essentially  a  failure;  for  while  it  has  nominally 
kept  rates  down  it  has  not  restricted  expenditures  and  it  cannot  do  so, 
for  it  provides  no  adequate  control  over  municipal  deficit  financiering. 

Such  control  over  tax  levies,  rates  and  expenditures  should  be  vital, 
not  mechanical;  flexible,  not  rigid;  carefully  calculated  by  an  authority 
on  which  responsibility  can  be  fixed,  and  not  imposed  from  the  outside 
in  utter  disregard  of  the  whole  financial  system.  Taxation  has  been  by 
far  the  most  popular  branch  of  public  finance  and  in  recent  years  most 
attention  has  been  given  to  it;  today  these  other  phases  of  the  subject 
are  of  even  greater  importance,  and  attention  to  them  will  afford  evai 
richer  results  for  the  public  good. 


83d  General  Assembly, 
Regular  Session,  1919. 

THE  SPECIAL  JOINT  COMMITTEE  ON  TAXATION. 

A  BILL 

Providing  for      levy  and  collection  of  a  tax  on  the  operation  of  motor 
vehicles  on^hc  public  roads  and  highways  of  this  state  and  tor  such 

STIonf^r^*  ^2^1'  6292,  6293.  6294,  6294-1  6'^95 

em.  6301,  e309,  I26I8.  12020,  12021  of  the  General  Code,  and  enacT: 

vmt'^^  Tr'l^  ^^"^TX  ^-2'  12618-1,  12618-2  and 

i4oieKi  of  the  General  Code. 

Be  U  enacted  by  the  General  Assembly  of  the  State  of  Ohio: 

SECTh-o«  I  Sections  6290,  6291,  6292,  6293,  6294,  6294-I,  6295, 
6301,  6309,  12618,  12620,  and  12621  of  the  General  Code^e  hereby 
T^S    ^nd  supplementary  sections  6309-1,  6309-2,  6309-3,  12618-1, 

bee.  6290.  *  ♦  ♦  As  used  in  this  chapter  and  in  the  penal  laws, 
except  as  otherwise  provided.    *    *  * 

{I)  -Motor  vehicle''  means  any  vehicle  propelled  or  drawn  by 
power  other  than  muscular  power  and  notjperated  exclusiveh  upon  rails 
or  tracks,  except  road  roHers,  traction  engines,  tractors,  trailers  designed 
to  be  draum  by  antn^l  po^ver  and  us.d  .r.ncipallyf  or  agricultural  pur- 
poses,  *  *  *  public  ambulances,  *  *  ard  vehicles  *  *  * 
bdongmg  to  any  police  department,  municipal  fire  department,  volunteer 
fire  company  ors  alvage  company,  organized  under  the  laws  of  Ohio  or 
used  by  such  *  *  *  department  *  ♦  *  or  *  ♦  *  com^nv 
m  the  discharge  of  its  functions.        »   *  ""'pany 

'J''*^'^'  ^^nd  ^'traction  engine''  mean  any  self-propelled 
vehicle  designed  or  used  for  dra^^ng  other  vehtcles  or  wheeled  machin^ 
2erZJ::^:'  ^^^^  independently  Tsl^h 

(3)  -Passenger  car^'  means  any  motor  vehicle  designed  and  used 
for  carrying  not  more  than  seven  persons, 

(4)  yommercial  car''  means  any  motor  vehicle  having  motive 
pouter,  designed  and  used  for  carrying  merchandise  or  freight  or  for 
carrying  more  than  seven  persons.  ' 

127 


S.  B.  No.  191 


128 


(5)  "Oztmer"  includes  any  person,  firm  or  corporation  having  title  ' 
to  a  motor  vehicle  or  the  exclusive  right  to  the  use  thereof  for  a  period 
of  greater  than  thirty  days,  other  than  a  manufacturer  or  dealer. 

(6)  "Manufacturer^'  and  "dealer"  include  all  persons,  firms  and 
corporations  engaged  in  the  business  of  manufacturing,  selling  or  leasing 
motor  vehicles. 

(7)  ''State"  includes  the  territories  and  federal  districts  of  the 
United  States,  and  the  provinces  of  the  Dominion  of  Canada. 

(8)  ''Public  roads  and  highways"  include  all  public  thoroughfares 
for  vehicles. 

Sec.  6291.  An  annual  license  tax  is  hereby  levied  upon  the  opera- 
tion of  motor  vehicles  on  the  public  roads  or  highways  of  this  state,  for 
the  purpose  of  enforcing  and  paying  the  expense  of  administering  the 
law  relative  to  the  registration  and  operation  of  such  vehicles  and  of 
maintaining  and  requiring  improved  roads  and  highways  and  streets. 
Such  tax  shall  be  at  the  rates  specified  in  this  cfmpter  and  shall  be  paid 
to  and  collected  by  the  secretary  of  state  at  the  time  of  making  applica- 
tion for  registration  as  herein  provided. 

Sec.  6292.  Each  owner  of  a  motor  vehicle  shall  pay  or  cause  to  be 
paid  tares  as  folloivs: 

For  each  motor  bicycle  or  motorcycle,  two  dollars  ad  fitfy  cents;  and 
for  each  side  car,  one  dollar  and  fifty  cents. 

For  each  passenger  car  hamng  twenty- five  horse-pow^  or  less,  eight 
dollars;  for  each  such  car  having  more  than  twenty- five  and  not  more 
than  thirty-five  horse-power,  twelve  dollars;  for  each  such  car  having 
more  than  thirty- five  horse-poiver,  twenty  dollars. 

For  each  commercial  car,  the  same  tax  based  on  horse-power,  and  in 
the  same  classificatiotts  as  are  herein  provided  for  passenger  cars,  and 
in  addition  thereto  twenty  cents  for  each  one  hundred  pounds  gross 
weight  of  vehicle  and  load,  or  fractional  part  thereof. 

For  each  trailer,  the  same  tax  based  on  gross  weight  of  vehicle  and 
load,  herein  provided  for  commercial  cars. 

The  minimum  tax  for  any  vehicle  having  motive  pozver  other  than  a 
motor  bicycle  or  a  motorcycle  shall  be  five  dollars;  and  for  each  trailer, 
two  dollars  and  fifty  cents. 

Each  manufacturer  or  dealer  .^hall  pay  or  cause  to  be  paid  a  tax  of 
twenty  dollars  for  each  place  of  business  in  this  state. 

Sec.  6293.  In  determining  the  gross  weight  of  vehicle  and  load,  in 
the  case  of  commercial  cars  designed  and  used  for  carrying  passengers, 
the  weight  of  passengers  shall  be  computed  at  one  hundred  and  tzventy- 
five  pounds  for  each  passenger,  according  to  the  number  of  seats  for 
adults  actually  provided,  and  such  weight  so  computed  added  to  the 


129 


weight  of  the  vehicle  fully  equipped.  In  determining  the  gross  weight 
of  vehicle  and  load  in  the  case  of  motor  trucks  and  trailers  the  manu- 
facturer's rated  carrying  capacity  shall  be  added  to  the  weight  of  the. 
vehicle  fully  equipped. 

The  horse  pozver  of  all  vehicles  propelled  by  internal  combustion 
engines  shall  be  computed  upon  the  following  formula:  Square  the 
diameter  of  the  cylinder  measured  in  inches,  multiply  by  the  number  of 
cylinders  and  divide  by  two  and  one-half.  For  all  motor  vehicles  pro- 
pelled by  steam  engines  the  rating  of  the  horse  power  thereof  shall  be 
based  on  the  system  of  rating  adopted  by  the  United  States  government. 

For  all  motor  vehicles  propelled  by  electricity  the  rating  of  the 
horse  power  thereof  shall  be  the  normal  horse-power  of  the  electric  motor 
therein,  to  be  ascertained  by  the  secretary  of  state. 

Sec.  6294.  Every  owner  of  a  motor  vehicle  which  shall  be  (grated 
or  driven  upon  the  public  roads  or  highways  of  this  state  shall  *  ♦  * 
before  the  first  day  of  January  of  each  year,  except  as  herein  otherwise 
expressly  provided,  cause  to  be  filed,  by  mail  or  otherwise,  in  the  office 
of  the  proper  deputy  registrar  of  motor  vehicles  a  written  application  for 
registration  for  the  following  year,  beginning  the  first  day  of  January 
of  such  year,  on  a  blank  to  be  furnished  by  the  secretary  of  state  for 
that  purpose,  containing  the  following  information: 

(1)  A  brief  description  of  the  motor  Vdiicle  to  be  r^;ist6red, 
including  the  name  of  the  manufacturer,  the  factory  number  of  such 
vehicle   *    *    *,    the  amount  of  motive  power,      any,  in  figures 

of  horse  power,  according  to  the  formula  prescribed  in  this  chapter, 
and,  in  case  of  commercial  cars  the  gross  weight  of  vehicle  and  load, 
computed  according  to  the  formula  prescribed  in  this  chapter. 

(2)  The  name  and  address  of  the  owner,    *  ♦ 

(3)  The  district  of  registration,  which  shall  be  determined  as 
follows: 

(a)  In  case  the  motor  vehicle  to  be  registered  is  used  for 
hire  or  principally  in  connection  with  any  established  business  or 
branch  business,  conducted  at  a  particular  place,  the  district  of 

registration  shall  be  the  mtmicipal  corporation  in  zvhich  such 
place  is  located;  and  if  not  located  in  any  municipal  corporation, 
the  county  in  which  such  place  is  located. 

(b)  In  case  such  vehicle  is  not  so  used,  the  district  of 
rcg'stration  shall  be.  the  municipal  corporation  or  county  in 
7vhich  the  owner  resides  at  the  time  of  making  application 


130 

Sec.  6294-1.  Upon  the  transfer  of  ownership  of  a  motor  vehicle 
its  registration  shall  expire,  and  it  shall  be  the  duty  of  the  original  owner 
to  immediately  notify  the  secretary  of  state  of  the  name  and  address  of 
the  new  owner  and  return  to  the  secretary  of  state  the  r^stration  cer- 
tificate for  cancellation.  The  original  owner  shall  also  remove  number 
plates  from  a  motor  vdiicle  upon  transfer  of  ownership  of  such  vehicle. 
Should  the  original  owner  make  application  for  the  registration  of 
another  motor  vehicle  within  thirty  days  after  such  cancellation,  he  may 
file  a  new  application  accompanied  by  a  fee  of  one  dollar,  and  pay  the 
tax  thereon,  less  the  amount  of  the  tax  that  would  be  collected  on  account 
of  the  vehicle  transferred,  on  the  date  of  such  application   *    *  *. 

Sec.  6295.  Every  owner  of  a  motor  vrfiicle  ♦  ♦  *  before 
operating  or  driving  such  motor  vehicle  upon  the  public  roads  or  high- 
ways of  this  state,  or  permitting  the  same  to  be  driven,  shall  file  a  like 
application.  On  all  applications  required  by  this  section  the  taxes  payable 
shall  be  as  follows :  ^ 

(1)  //  said  application  be  made  prior  to  April  first,  the  nor- 
mal tax. 

(2)  //  made  on  or  after  April  first  and  prior  to  July  first, 
three-fourths  of  the  normal  tax. 

(3)  //  made  on  or  after  July  first  and  prior  to  October  first, 
one-half  of  the  normal  tax;  and 

(4)  //  made  on  or  after  October  first  one-fourth  of  the  nor- 
mal tax. 

Publicly  owned  and  operated  motor  vehicles  shall  be  registered  as 
provided  m  this  chapter,  without  charge  of  any  kind;  hut  this  provision 
shall  not  be  construed  as  exempting  the  operation  of  such  vehicles  from 
any  other  provision  of  this  chapter  and  the  penal  laivs  relating  thereto. 
The  secretary  of  state  shall  accept  any  application  to  register  a  motor 
vehicle  ozvtied  by  the  Federal  Government  which  may  be  made  by  any 
officer,  department  or  agent  of  such  gozrernment. 

Sec.  6298.  Upon  the  filing  of  «uch  application  *  ♦  *  and  the 
payment  of  the  tax  imposed  by  this  chapter,  the  secretary  of  state  shall 
assign  to  such  motor  vehicle  a  distinctive  number,  and,  without  expense 
to  the  applicant,  isue  and  deliver  to  the  owner  in  such  manner  as  the 
secretary  of  state  may  select  a  certiticate  of  registration,  in  such  form  as 
the  secretary  of  state  shall  prescribe,  and  two  number  plates,  duplicates 
of  each  other,  at  the  post  or  express  oflice  within  the  state  of  Ohio 
named  in  said  application. 

Sec.  6301.  A  manufacturer  of  or  dealer  in  motor  vehicles,  shall 
make  application,  in  like  manner,  as  hereinbefore  provided,  for  each 


gasoline,  steam,  electric  or  other  make  of  motor  vehicles,  so  manufac- 
tured or  dealt  in    *    ♦    *,  to  be  determined  by  the  motive  power  of 
such  vehicles;  excepting  that  for  the  purpose  of  such  application  the  dis- 
^       irict  of  registration  shall  be  stated  for  each  place  in  this  state  at  which 
the  business  of  mannfaciurinc  or  dealing  in  motor  vehicles  or  any  branch 
thereof  is  carried  on,  and  the  application  shall  show  the  make,  or  mafc/s 
so  manufactured  or  dealt  in  at  each  such  place.    Upon  the  filing  of  such 
application,  and  the  payment  of  the  tax  imposed  by  this  chapter  *  *  * 
the  secretary  of  state  shall  assign  to  each  make  of  motor  vehicle  therein 
described  a  distinctive  number  which  must  be  carried  and  displayed  by 
each  motor  vehicle  of  such  make  in  like  manner  as  provided  in  this  chai>- 
tcr  while  it  is  operated  on  the  public  highway  until  it  is  sold  or  let  for 
hire.    Such  manufacturer  or  dealer,  so  registering  a  make  of  motor 
vehicle,  may  procure  certified  copies  of  such  registration  certificate  upon 
^      the  payment  of  a  fee  of  five  dollars.  With  each  of  such  certified  copies 
the  secretary  of  state  shall  furnish  two  placards  with  the  same  number- 
ing im>vidpd  in  the  orignal  registration  certificates,  and  may  add  thereto 
such  special  desigtiation  as  rnay  he  necessary  to  distinguish  one  set 
thereof  from  another.    Nothing  in  this  section  nor  in  section  six  thou- 
sand turo  hundred  and  ninety-two  of  the  General  Code  shall  be  so  con- 
strued as  to  exempt  any  manufacturer  or  dealer  from  registration  or 
taxaiwn  w  respect  of  any  other  motor  vehicle  of  which  he  is  the  oumer 
,or  any  purpose  other  than  sale,  lease  or  other  like  disposition. 

Sec.  6309.    The  comity  auditor  of  each  county  in  this  state  shall  be 
'■'xofficio  a  deputy  registrar  of  motor  vehicles,  and  in  such  capacitv  shall 
h       act  for  the  secretary  of  state  in  the  discharge  of  the  duties  inmtosed  upon 
such  secretary  by  this  chapter  in  the  follonmg  particulars,  and  no  other: 

(1)  The  receipt  of  applications  for  registration  and  for  certi- 
fied copies  of  registration  cerHficates.  All  applications  shall  be 
made  to  the  deputy  registrar  for  the  county  in  which  the  applicant 
resides,  unless  the  applicant  is  a  corporation  or  a  non-resident  of 
this  state,  in  which  event  application  may  be  made  in  any  county  in 
zvhich  the  applicant  maintains  a  place  at  which  the  business  is  con- 
ducted, in  connection  with  which  the  motor  vehicles,  or  makes  of 
motor  vehicles,  requiring  registration  are  used.    All  applications 

>  shall  be  forwarded  to  the  secretary  of  state  for  registration. 

(2)  The  collection  of  taxes  payable  on  applications  made  to 
htm,  and  fees  payable  on  like  applications,  under  the  provisions  of 
section  6294-1  of  the  General  Code.  From  the  proceeds  of  collec^ 
twns  made  by  him  such  deputy  shall  be  entitled  to  retain  the  fees 

^  provided  herein  which  shaU  be  paid  into  the  county  treasury  to  the 


132 

credit  of  the  county  auditor's  fee  fund.  The  remainder  of  such 
registration  and  duplicate  registration  fees  he  shall  remit  weekly  to 
Jhe  secretary  of  state.  From  the  remainder  of  such  taxes  collected 
he  shaU  retain  the  portion  of  the  revenue  due  to  any  district  of 
reffistfittion  located  in  whole  or  in  part  in  his  county  and  immediately 
certify  the  same  into  the  county  treasury  to  the  credit  of  the  un^ 
diznded  t<ix  fund  therein  in  the  manner  prescribed  by  law,  and  the 
balance  he  shall  remit  weekly  to  the  secretary  of  state.  The  secre- 
tary of  state  shall  require  of  him  weekly  statements  accompanying 
such  remittances,  and  setting  forth  in  such  form  as  such  secretary 
may  prescribe,  the  distribution  of  collections  made  by  such  deputy 
and  the  facts  necessary  to  enable  such  secretary  to  make  any  further 
distribution  of  the  sums  remitted  which  may  be  required  by  this 
chapter. 

(3)  The  distribution  of  certificates  and  number  placards  and 
copies  and  duplicates  thereof  if  required  by  the  secretary  of  state, 

(4)  Such  other  duties  arising  under  this  chapter  as  the  secre- 
tary of  state  by  rule  or  order  may  direct.  The  secretary  of  state 
may  adopt  such  rules  and  orders  as  he  may  deem  necessary  or  con- 
venient governing  the  manner  of  the  discharge  of  the  duties  to  which 
this  section  relates,  and  may  alter  them  at  pleasure. 

Sec.  6309-1.  For  his  services  as  deputy  registrar  of  motor 
vehicles  each  county  auditor  shall  be  entitled  to  charge  and  retain  a 
fee  of  twenty  cents  for  each  application  for  registration  or  duplicate 
registrtUion  received  by  him  except  as  herein  provided.  All  fees  so 
retained  shall  be  charged  to  and  deducted  from  the  state's  share  of 
the  revenue  as  hereinafter  provided.  Each  county  auditor  may 
employ  such  culditional  clerks  for  the  purpose  of  assisting  in  the 
performance  of  his  duties  as  such  deputy  registrar  as  tnax  be  neces- 
sary. The  entire  amount  retained  by  him  as  fees  under  the  pro- 
visions of  this  chapter  shall  be  available  for  the  payment  of  the 
compensation  of  such  clerks  without  the  necessity  of  any  allowance 
thereof  by  the  county  commissioners  or  other  authority. 

The  secretary  of  state  may  direct  any  county  auditor  to  deputise  any 
specified  responsible  citizen  or  organization  to  aid  in  the  discharge  of 
the  duties  mentioned  in  the  preceding  section.   Such  sepcial  deputies  ma\ 

rcceiz^e  applications  for  registration  and  collect  fees  and  taxes,  but  sha'l 
immediately  transmit  to  the  county  auditor  the  applications  and  moneys 
so  received,  and  the  county  auditor  shall  perform  all  further  duties  men- 
tioned in  said  section  with  respect  thereto. 

In  all  other  respects  such  special  deputies  shall  be  authorised  and 
required  to  perform  the.  duties  mentioned  in  said  section  for  and  on 


133 


behalf  of  the  county  auditor.  Each  such  special  deputy  shall  give  bond 
to  the  county  auditor  m  snch  amumnt  as  may  be  partieularly  prescribed 
by  the  secretary  of  state,  conditioned  for  the  faithful  performance  of 
said  duties.  Such  special  deputies  shall  receive  no  compensation,  but 
the  secretary  of  state  may  allow  and  pay  all  or  such  part  of  the  actual 
and  necessary  expense  incurred  by  any  such  special  deputy  as  he  may 
deem  reasonable  out  of  his  appropriation  for  the  expense  of  administering 
the  provisions  of  this  chapter.  On  all  applications  received  by  special 
deputies,  the  county  auditor  shall  charge  and  retain  a  fee  of  five  cents  in 
lieu  of  the  other  fees  provided  by  this  section. 

Sec.  6309-2.  The  revenue  collected  under  the  provisions  of  this 
chapter  shall  be  distributed  as  follows : 

(1)  All  fees  collected  under  this  chapter  less  auditor's  fees, 
shall  be  paid  into  the  state  treasury  to  the  credit  of  a  fund  to  be 
designated  as  the  "State  maintenance  and  repair  fund." 

(2)  Fifty  per  centum  of  all  taxes  collected  under  the  pro- 
visions of  this  chapter  shall  be  for  the  use  of  the  municipal  corpora- 
tion or  county  which  constitutes  the  district  of  registration  as  pro- 
vided in  this  chapter.  Such  moneys  shall  be  paid  into  the  treasury 
of  the  proper  county  as  provided  herein  and  distributed  as  are  other 
faxes.  In  the  treasuries  of  such  municipal  corporations  and  counties, 
maintenance  and  repair  of  improved  roads  and  highways  and  streets 
such  moneys  shall  constitute  a  fund  which  shall  be  used  for  the 
and  for  no  other  purpose,  and  shaU  not  be  subject  to  transfer  to  any 
other  fund.  "Maintenance  and  repair"  as  used  in  this  section,  in- 
cludes all  work  done  upon  any  improved  road  or  highzvay.  or  upon 
any  street,  in  zvhich  the  existing  foundation  thereof  is  used  as  the 
sub-surface  of  the  improvement  thereof,  in  whole  or  in  substantial 
part. 

(3)  Pifly  per  centum  of  all  taxes  collected  under  the  pro- 
^  visions  of  this  chapter,  less  auditor's  fees  retained,  shall  be  paid  by 

the  secretary  of  state  into  the  state  treasury  to  the  credit  of  the 
"State  maintenance  and  repair  fund." 

The  ''State  maintenance  and  repair  fund""  provided  for  herein 
shall  be  available  for  the  use  of  the  secretary  of  state  in  defraying 
the  expenses  incident  to  carrying  out  and  enforcing  the  provisions 
♦  of  this  chapter  and  for  the  use  of  the  state  highway  commissioner 
in  the  manner  provided  by  law.  The  general  assembly  shall  tnake 
appropriations  therefrom  for  such  purpose. 

Sec.  6309-3.    All  taxes  remitted  to  the  secretary  of  state  by 
deputy  registrars  of  motor  vehicles,  under  the  provisions  of  this 


134 


chapter,  from  which  the  shares  of  the  revenue  due  to  particular 
counties  or  municipal  corporations  have  not  been  retained,  shall  be 
apportioned  by  the  secretary  of  state,  who  shall  remit  quarterly  to 
the  auditor  of  each  county  the  amount  thereof  due  to  such  county 
or  to  an^  municipal  corporation  located  therein,  in  whole  or  in  part, 
accompanied  by  a  statement  showing  the  distribution  thereof.  Such 
county  auditor  shall  thereupon  certify  such  amount  into  the  county 
treasury  to  the  credit  of  the  undivided  tax  fund  therein. 

Spc.  12618.  Whoever  operates  or  drives  a  motor  vehicle  upon  the 
highways  of  this  state,  displaying  thereon  a  distinctive  number  or  iden- 
lification  marie  which  is  *  *  *  fictitious,  or  belongs  to  another 
motor  vehicle,  or  belongs  to  a  motor  vehicle  the  oivnership  of  which  has 
been  transferred  after  initial  rcijist ration  under  such  number  or  mark, 
shall  be  fined  twenty-five  dollars,  and  for  a  subsequent  offense  shall  be 
fined  not  less  than  fifty  dollars  nor  more  than  three  hundred  dollars  or 
impriscmed  for  sixty  days  or  both. 

Sec.  12618-1.  Whoever  operates  or  drives  upon  the  hialncavs  of 
tms  state  a  motor  vehicle  acquired  from  a  former  owner  who  has  regis- 
tered the  same,  displaying  thereon  the  distinctive  number  or  identifica- 
tion mark  assigned  to  such  motor  vehicle  on  such  original  registration, 
shall  be  fined  twenty-five  dollars,  and  for  a  subsequent  offense  shall  be 
fined  not  less  than  fifty  dollars  nor  more  than  three  hundred  dollars  or 
nnprisaned  for  sixty  days  or  both. 

Sec.  T 2618-2.  Whoever  operates  or  drives  a  motor  vehicle  upon  the 
highways  of  this  state  displaying  thereon  a  distinctive  number  or  iden- 
tification mark  belonging  to  a  manufacturer  or  dealer,  when  such  motor 
vehicle  is  not  held  by  such  manufacturer  or  dealer  excluHvely  for  sale, 
lease  or  other  like  disposition  shall  be  fined  twenty-five  dollars,  and  for  a 
subsequent  offense  shall  be  fined  not  less  than  fifty  dollars  nor  more  than 
five  hundred  dollars  or  imprisonment  for  sixty  days,  or  both. 

Sec.  12618-4.  Whoever  being  the  owner  of  a  motor  vehicle  or  a 
manufacturer  of  or  dealer  in  motor  vehicles,  knowingly  makes  a  false 
statement  in  an  application  for  the  registration  of  such  vehicle  or  vehicles, 
shall  be  fined  not  less  than  twenty-five  dollars  and  not  more  than  tzvo 
hundred  doUars,** 

^  Sec.  12618-3.  Whoever,  being  the  ozvner  of  a  motor  vehicle  and  a 
resident  of  this  state,  operates  or  drives  such  motor  vehicle  upon  the 
highways  of  this,  state  displaying  thereon  a  distinctive  number  or  iden- 
tication  mark  issued  by  or  under  the  authority  of  another  state  without 
complying  wUh  the  laws  of  thit  state  relating  to  the  registration  and  iden- 
Hficatian  of  motor  vehicles  shall  be  fined  twenty-five  dollars  and  for  a 


subsequent  offense  shail  be  fined  not  less  tlum  fifty  doHars  nor  more  than 
five  hundred  dollars  or  i}nprisoned  for  sixty  days  or  both. 

Sec.  12620.  Whoever,  being  the  owner  or  chauflfeur  of  a  motor 
vehicle  operated  or  driven  upon  the  public  roads  or  highways,  failed  to 
file  or  cause  to  be  filed  annually  the  application  for  registration  required 
by  law  or  to  pay  the  *  *  *  tax  therefor,  shaU  be  fined  not  more 
than  twenty-five  dollars. 

^  Sec  12621.  Whoever,  being  a  manufacturer  or  dealer  in  motor 
vehide»,  fails  to  file  or  cause  to  be  filed  an  application  for  registration, 
as  required  by  law,  and  to  pay  the  *  *  *  taj;  therefor  and  to  apply 
for  and  pay  the  legal  fees  for  as  many  certified  copies  thereof,  as  the 
law  requires,  shall  be  fined  not  more  than  twenty-five  d<dlars. 

Section  2.  Original  sections  6290,  6291,  6292,  6293,  6294,  6294-1, 
<529S»  6298,  6301,  12618,  12620^  and  12621  of  the  General  Code  are  here- 
by repealed. 

This  Act  shall  not  affect  the  resigstration  of  motor  vehicles  for  the 
yeai:  1919. 


JOINT  RESOLUTION. 

Proposing  to  amend  the  constitution  of  the  state  of  Ohio  by  adopting  a 
new  ^section,  to  be  designated  as  section  13.of  Article  VIII  theieof,  ' 
relating  to  the  creation  of  bonded  indebtedness. 

Be  it  resolved  by  the  General  Assembly  of  the  state  of  Ohio,  three- 
fifths  of  the  members  elected  to  each  house  concurring  therein : 

That  there  shall  be  submitted  to  the  electors  of  the  state  for  their 
approval  or  rejection,  in  the  manner  provided  by  law,  at  the  general 
election  to  be  held  on  the  Tuesday  after  the  first  Monday  in  November, 
nmeteen  hundred  and  twenty,  a  proposal  to  amend  the  constitution  of 
the  state  of  Ohio  by  adopting  the  following  section,  to  be  designated  as 
section  13  of  Article  VIII  thereof,  and  the  schedule  thereto  appended: 

ARTICLE  Vin. 

Section  13:  The  net  bonded  indebtedness  of  any  subdivision  of 
this  state  shall  never  exceed  the  limitations  fixed  by  this  section.  Such 
net  bonded  indebtedness  shall  be  the  difference  between  the  principal  of 
b<mds  issued  by  the  subdivision,  with  the  exceptions  mentioned  herein, 
and  the  amount  held  in  sinking  funds  and  applicable  to  the  retirement 
thereof.  The  limitations  shall  be  the  following  percentages,  to  be  com- 
puted in  each  case  upon  the  assessed  value  of  the  taxable  real  property  in 
the  subdivision,  exclusive  of  separately  assessed  mines,  minerals  and 
mineral  rights :  counties,  two  percentum ;  townships,  one  and  (mc-half 
per  centum;  school  districts,  three  per  centum;  municipal  corporations, 
four  and  one-half  per  centum;  other  districts,  including  special  taxing 
districts,  one  per  centum. 

The  following  bonds  and  sinking  fund  balances  applicable  thereto 
shall  not  be  considered  in  ascertaining  net  indebtedness;  those  issued  in 
anticipation  of  the  levy  or  collection  of  special  assessments,  to  the  extent 
of  the  anticipated  assessments,  against  private  property ;  those  issued  to 
acquire,  construct  or  improve  property  froni  the  use  of  which  revenue  is 
or  is  to  be  derived,  in  the  proportion  that  the  surplus  revenue  applied 
to  interest  and  sinking  fund  during  the  preceding  fiscal  year,  or,  in  case 
of  original  acquisition  or  construction,  the  surplus  of  anticipated  annual 
revenue  pledged  to  be  so  applied,  bears  to  the  interest  and  sinking  fund 
requirements  of  such  bonds;  and  emergency  bonds  issued  for  the  re- 
placement or  restoration  of  property  destroyed  or  injured  by  unforeseen 
casualty,  or  for  defraying  the  expenses  of  an  epidemic -of  disease,  and 

136 


137 


all  amounts  held  in  sinking  funds  for  their  retirement,  in  cases  in 
which  the  general  assembly  may,  by  general  laws,  authorize  the  exclu- 
Mon  of  such  emergency  bonds  from  consideration  under  this  section ; 
hut  the  amount  of  such  emergency  bonds  which  may  be  so  excluded 
from  consideration  shall  not  exceed  in  any  case  twenty-five  per  centum 
of  the  net  bonded  indebtedness  of  the  sub-division  at  the  time  of  the  oc- 
currence of  the  emergency  and  such  excluded  emergency  bonds  shaU  not 
run  for  more  than  eight  years  from  their  issuance. 

No  bonds  issued  for  property  or  improvements  shall  run  for  a 
longer  time,  than  the  probable  period  of  usefulness  of  such  property  or 
miprovements,  and  in  no  case  longer  than  forty  years  from  their  issuance. 
Bonds  for  other  purposes  shall  not  run  for  more  than  eight  years  from 
their  issuance. 

All  bonds  hereafter  issued  beyond  the  limitations  of  this  section 
shall  be  void.  The  general  assembly  may  impose  additicmal  limitations 
upon  the  creatkm  of  public  indebtedness,  whether  bcmded  or  not. 

SCHEDULE. 

If  the  foregoing  amendment  shall  be  approved  by  the  electors  it 
shall  take  efl^ect  as  a  part  of  the  constitution  on  the  first  day  of  January, 
nineteen  hundred  twenty-one.  All  bonds  then  outstanding,  and  all 
amounts  then  held  in  sinkii^  funds  for  their  retiremet,  excepting  the 
first  two  classes  of  excluded  bcmds  and  sinking  fund  balances  mentioned 
therein,  shall  be  considered  in  applying  the  limitations  thereof;  but  if 
valid  when  issued  such  b<Mids  shall  not  be  impaired  or  otherwise  affected 
thereby.  •  . 

If,  on  the  first  day  of  January,  nineteen  hundred  twenty-one,  the 
net  bonded  indebtedness  of  any  subdivision  shall  exceed  the  amount  of 
Fuch  indebtedness  which  such  subdivisibn  may  have  under  the  limitations 
prescribed  by  the  forcing  amendment,  then  and  in  that  event  the 
limitation  for  such  subdivision  shall  be  the  amount  of  its  net  bonded 
indebtedness,  ascertained  as  provided  in  said  amendment,  as  of  the  first 
day  of  the  fiscal  year  of  the  subdivision  in  which  the  limitation  is  ap- 
plied, plus  fifty  per  centum  of  the  amount  added  to  the  sinking  fund 
and  applicable  to  the  retirement  of  the  bcmds  considered  in  ascertaining 
the  limitation,  during  the  next  previous  fiscal  year;  and  such  limitation 
shall  «>ntinue  to  be  applied  to  the  net  bonded  indebtedness  of  such 
subdivision  in  the  manner  prescribed  by  such  amendment  until  the  net 
bonded  indebtedness  thereof  becomes  reduced  to  the  amount  of  such 
indebtedness  permitted  by  the  strict  application  of  the  limitations  of 
the  foregoing  amendment  to  such  subdivision.  For  the  purpose  of  in- 
creasing the  sinking  fund  on  account  of  such  bonds,  the  taxing  authori- 
ties of  such  subdivision  may  levy  taxes  upon  the  taxable  property  therein 


138 

in  any  year  within  the  period  in  which  the  temporary  limitation  provided 
for  in  this  schedule  shall  apply,  in  addition  to  such  taxes  as  would  be 
required  to  pay  the  interest  and  provide  strictly  for  the  sinking  fund 
cm  acommt  of  such  bonds;  the  rate  of  such  levy  shall  not  exceed  one 
mill,  but  such  levy  shall  not  be  subject  to  any  statutory  limitation  on 
tax  rates,  nor  be  ccuisidered  in  applying  any  such  limitation. 


83RD  General  Assembly 
Regular  Session  1919 


S.  B.  No.  202. 


THE  SPECIAL  JOINT  COMMITTEE  ON  TAXATION. 

A  BILL 

Providing  for  the  levy  and  distribution  of  taxes  on  the  taxable  propotf 
of  the  state  for  the  support  of  common  schools,  the  adjustment  of 
tax  Hmitations  applicaWe  to  levies  for  local  school  and  township 
purposes,  the  repeal  of  the  laws  relating  to  state  aid  for  weak 
school  districts,  and  the  abolition  of  state  levies  for  sinking  fund, 
university  and  normal  school  purposes ;  and  to  such  ends  amending 
sections  5659-3a,  5649-4,  7575,  7582,  7587,  7595,  7596,  7597,  7600, 
7608,  7613,  7736,  7747,  7751,  and  7787  of  the  General  Code,  enacting 
a  supplementary  section  to  be  designated  as  section  7600-1  of  the 
General  Code  and  repealing  sections  3204,  7594-1,  7595-1,  7595-2, 
75»5-8,  7595-4,  7802,  7804,  7924,  7925,  7926,  7927a,  7927b,  7928  7929. 
and  7966  of  the  Genetal  Cbde. 

Be  it  enacted  by  the  General  Assembly  of  the  State  of  Ohio; 

Section  i.  Sections  5649-3ay  5649-4,  7575,  7595,  7596,  7597,  760D, 
7003,  7613,  7736,  7747,  7751,  and  7787  of  the  Gemral  Cade  are  hereby 
amended  and  a  suj^ementaiy  se<?tion  to  be  designated  as  section  7600-1 
of  the  General  Code  is  hereby  enacted  as  fallows : 

Sec.  5649-33.  On  or  before  the  first  Monday  in  June,  each  year, 
the  county  commissioner  of  each  county,  the  council  of  each  municipal 
corporation,  the  trustees  of  each  township,  each  board  of  education  and 
all  other  boards  or  officers  authorized  by  law  to  lievy  taxes,  within  the 
county,  except  taxes  for  state  purposes,  shall  submit  or  cause  to  be  sub- 
mitted to  the  county  auditor  an  annual  budget,  setting  forth  in  itemized 
form  an  .estimlate  stating  the  amount  of  money  needed  for  their  wants 
for  the  incoming  year,  and  for  each  month  thereof.  Such  annual  budgets 
shall  specifically  set  forth : 

( 1 )  The  amounts  to  be  raised  for  each  and  every  purpose  allowed 
by  law  for  which  it  is  desired  to  raise  money  for  the  incoming  year. 

(2)  The  balance  standing  to  the  credit  or  debit  of  the  several 
ftmds  at  the  end  of  the  last  fiscal  year. 

(3)  The  monthly  expenditures  from  each  fund  in  the  twelve 
months  and  the  monthly  expenditures  from  all  funds  in  the  twelve 
months  of  the  last  fiscal  year. 

139 


140 

(4)  The  annual  exin^nclitures  from  each  fund  for  each  year  of  ihe 
last  live  fiscal  years. 

(5)  The  hionthly  average  of  such  exi)enditures  from  each  of  the 
several  funds  for  the  last  fiscal  year,  and  also  the  total  monthly  averaj^c 
of  all  of  thenv  for  the  last  five  fiscal  years. 

(6)  The  amount  of  money  received  from  any  other  source  and 
available  for  any  purpose  in  each  of  the  last  five  fiscal  years,  together  with 
an  estimate  of  the  probable  amount  that  may  be  received  during  the  in- 
coming year,  from  such  source  or  sources. 

(7)  The  amount  of  the  bonded  indebtedness  setting  out  each  is- 
sue and  the  purpose  for  which  issued,  the  date  of  issue  and  the  date  of 
maturity,  the  original  amount  issued  and  the  amount  outstanding,  the 
rate  of  interest,  the  sum  necessary  for  interest  and  sinking  fund  purposes, 
and  the  amount  required  for  all  interest  and  sinking  fund  purposes  for 
the  incoming  year. 

(8)  The  amount  of  all  indebtedness  incurred  under  authority  of 
secti<m  5649-4  and  the  amount  of  such  additional  taxes  as  ma/  have  been 
authorized  as  provided  in  section  5649-5  of  the  General  Code,  setting 
out  each  issue  in  detail  as  provided  in  the  next  preceding  paragraph. 

(9)  Such  other  facts  and  information  as  Ac  tax  commission  of 
Ohio  or  the  budget  commisskmers  may  require. 

The  aggregate  of  all  taxes  that  may  be  levied  by  a  county,  for 
county  purposes,  on  the  taxable  property  in  the  county  on  the  tax  list, 
shall  not  exceed  in  any  one  year  three  mills.  The  aggr^te  of  all  taxes 
that  may  be  levied  by  a  municipal  corporation  on  the  taxable  property 
in  the  corporation,  for  a»poraticm  purposes,  on  the  tax  list,  shall  not 
exceed  in  any  one  year  five  mills.  Itie  aggregate  of  all  taxes  that  may  be 
levied  by  a  township,  for  township  purposes,  on  the  taxable  property  in 
the  township  on  the  tax  list,  shall  not  exceed  in  any  one  year  *  ♦  *  * 
one  and  five-tenths  mills.  The  local  tax  levy  for  all  school  purposes  shall 
not  exceed  in.  any  one  year  *  *  *  three  mills  on  the  dollar  of  v|duation 
of  taxable  property  in  any  school  district.  Sudi  limits  for  county,  town- 
ship, municipal  and  schocrf  levies  shall  be  exclusive  of  any  special  levy, 
provided  for  by  a  vote  of  the  electors,  special  amendments,  levies  for 
road  taxes  that  may  be  worked  out  by  the  taxpayers,  and  levies  and  as- 
sessments in  special  districts  created  for  road  or  ditch  improvements, 
over  which  the  budget  commissioners  shall  have  no  control. 

Such  budget  shall  be  made  up  annually  at  ^  time  or  times  now 
fixed  by  law  when  such  boards  or  officers  are  required  to  determine  the 
amount  in  money  to  be  raised  or  the  rate  of  taxes  to  be  levied  in  their 
respective  taxing  districts. 


141 


The  county  auditor  shall  provide  and  furnish  such  1)oards  and  officers 
Wank  forms  and  instructions  for  making  up  such  budgets. 

Sec.  5649-4.  For  the  emergencies  mentioned  in  sections  forty-four 
hundred  and  fifty,  forty-four  hundred  and  fifty-one,  fifty-six  hundred 
and  twenty-nine,  *  *  *  and  7630-1  of  the  General  Ccxle,  and  for  local 
school  purposes  authorized  by  a  vote  of  the  electors  under  the  provisions 
of  sectiofis  5649-5  and  3649-5(J'  of  the  General  Code,  to  the  extent  of  two 
mills  for  such  school  purposes,  the  taxing  authorities  of  any  district  may 
levy  a  tax  sufficient  to  provide  therefor  irrespective  of  any  of  the  limita- 
tions of  this  chapter,  _  ' 

Sec.  7575.  For  the  purpose  of  aflFording  the  advantages  of  a  free 
education  to  all  the  youth  of  the  state,  there  shall  be  levied  annually  a 
tax  of  *  *  ♦  one  and  sezmi-tenths  mills  on  the  grand  list  of  the  taxable 
property  of  the  state,  to  be  collected  as  are  other  state  taxes  and  the 
proceeds  of  which  shall  constitute  "the  state  common  school  fund,"  and 
*  *  *  ffw  additional  tax  of  one  mill,  the  proceeds  of  which  shall  be  re- 
tained  in  the  several  counties  for  the  support  of  the  schools  therein. 

Sec  7582.  The  auditor  of  state  shall  apportion  the  state  common 
school  fund  to  the  several  counties  of  the  state  semi-annually,  upon  the 
basis  of  the  enumeration  of  youth  therein,  as  shown  by  the  latest  ab- 
stract of  enumeration  transmitted  to  him  by  the  superintendent  of  public 
instruction ;  provided,  however,  that  the  sum  of  five  hundred  thousand 
dollars  shall  be  retained,  from  such  apportionment  and  held  in  the  stale 
treasury  as  a  reserve  in  the  state  common  school  fund  for.  the  equalisation 
of  educational  advantages  throughout  the  state.  Before  making  his 
February  settlement  with  county  treasurers,  he  shall  apportion  such 
amount  thereof  as  he  estimates  to  have  been  collected  up  to  that  time  and 
in  the  settlement  sheet  which  he  transmits  to  the  auditor- of  each  county, 
shall  certify  the  amount  payable  to  the  treasurer  of  his  county.  Before 
making  his  final  settlement  with  county  treasurers  each  year  he  shall 
apportion  the  remjaindef  of  the  whole  fund  collected,  as  nearly  as  it  can 
be  ascertained/  and  in  the  August  settlement  ^eet  which  he  transmits  to 
the  auditor  of  each  county  shall  certify  the  amount  payable  to  the  treas- 
urer of  his  county. 

Sec.  7587.  Such  levy  shall  be  divided  by  the  board  of  education 
into  four  funds :  First,  tuition  fund ;  second,  building  fund ;  third,  con- 
tingent fund ;  fourth,  bonds,  interest  and  sinking  fund.  A  separate  levy 
must  be  made  for  each  fund.  The  levy  for  tuition  fund  to  the  extent 
of  one  mill  shall  be  subject  only  to  the  limitation  on  the  combined  maxi- 
mum rate  for  all  taxes  levied  in  the  school  district. 

Sec.  7595.  The  state  ^superintendent  of  public  instruction  shall  ad- 
minister the  reserve  in  the  state  common  school  fund  for  the  equalisa- 


142 


tion  of  educational  advantages  thnuujhout  ilic  state.    The  board  of  edu^ 

TZr^  r'  "'r/  ^'"^  ^^^^^  *^  first  Monday 

ui  Septnuber  and  the  first  day  of  October  of  any  year,  apply  to  the  stJe 

Such  appUcatton  shaU  be  made  in  such  form  and  shaU  set  forth  such 
informoHon^as  the  state  supenntendent  shall  prescribe.  If  it  appears 
fr^^^ch  application  that  the  revenue  resources  of  the  district  are  ins uf^ 
ficient  to  enable  the  applicant  hoard  to  conduct  the  schools  thereof  with- 
out  parttctpaHon  in  such  reserz^e,  the  state  superintendent  shaU  cause  an 
mspectwn  of  the  schools  of  the  district  and  the  accounts  of  the  applicant 
board^  Lpon  such  examinaHon  the  state  superintendent  shall  ascertain 
whether  or  not  the  proportion  of  pupils  to  teachers  in  the  district  is  rea- 
sonable  and  proper  having  regard  to  the  topography  and  population  of 

[  a  I^Z  '  ^^'^      ''^'^'^'^     reasonable,  the 

budget  of  contingent  expenses  and  building  enterprises  is  commensurate 
unth  the  actual  needs  of  the  district;  and  the  revenue  resources  of  the 
atstrict  have  been  exhausted. 

Sec.  7596.  //.  upon  such  examination,  the  supeHntendent  of  public 
•  tnstructum  vs  satisfied  that  any  adjustments  or  ehanges  in  local  school 
policy  and  adtmntstration  should  be  made  as  a  condition  of  participation 
m  the  reserve  m  the  state  common  school  fund,  he  mav  order  such  ad- 
justments and  cluxnges  to  be  made.  For  this  purpose  he  shaU  have 
pojver  to  order  any  local  board  of  education  or  any  county  board  of 
education  to  exercise  any  power  of  whatsoever  character  in  them  ve^ed 
by  law,  and  such  order  shall  be  complied  with  forthwith. 

Sec  7597.   After  his  orders  have  been  complied  ivith,  the  state 
superintendent  of  public  instruction  shall  ascertain  the  probable  amount 
required  to  supplement  the  revenues  of  such  dutrict  in  order  to  enable 
board  of  education  thereof  to  conduct  the  schools  of  the  district  and 
certify  the  same  to  the  auditor  of  state.    He  shaU  thereafter, from  time 
to  tune  zmthm  the  amount  so  ascertained,  and  so  long  J  his  orders  Z 
comphed  unth,  draw  his  vouchers  on  the  auditor  of  Lte  for  such  suZs 
as  may  be  actuaUy  needed  by  such  district    The  auditor  shall  issue  7^ 
warrants  therefor  payable  out  of  any  appropriation  made  by  the  general 
assembly  from  the  reserve  in  the  state  common  school  fund  Anv 
balance  of  such  reserve  remaining  at  the  end  of  any  fiscal  year  shaU 

to  Zu  "'^''^  ^"^^  apporUoned  accordZ 

Sec  7600.   After  each  jmi^annual  settlement  with  the  county  treas- 

^^LT^  '^^^  immediately  apportion  school  funds  for 

his  county  The  state  common  school  fund  shall  be  apportioned  *♦*  to 
each  school  district  and  part  of  district  within  th^  county        on  the 


Hi 


basis  of  the  number  of  teachers  employed  therein,  as  shown  by  the  re- 
ports required  by  law,  ***  and  the  balance  ♦**  acccM-ding  to  the  ratio 
7vhich  the  aggregate  days  of  attendance  of  pupils  in  such  districts  bears 
to  the  aggregate  days  of  attendanbe  of  pupils  in  the  entire  county.  The 
annual  distribution  attributable  to  teachers  shall  be  according  to  the  foU 
humg  schedule:  twenty-five  per  centum  of  the  salary  of  each  teacher 
holding  a  regular  certificate  other  than  a  temporary  or  emergency  certifi- 
cate and  receiving  a  salary  not  less  than  eight  hundred  dollars:  but  not 
to  exceed  three  hundred  and  fifty  dollars  for  any  such  teacher. 

The  proceeds  of  the  levy  required  by  section  seven  thousand  five 
hundred  and  seventy-five  to  be  retained  in  the  county  shall  be  apportioned 
to  each  school  district  and  part  of  district  on  a  like  basis  of  teachers  em- 
ployed and  aggregate  days  of  attendance  of  pupils,  excepting  that  the 
apportionment  attributable  to  teachers  shaU  be  twelve  and  one-half 
centum  of  the  salaries  of  such  teachers  as  are  mentioned  in  this  section, 
but  not  to  exceed  one  hundred  and  seventy-five  doUars  for  any  such 
teacher.    No  school  district  shall  be  entitled  to  receive  any  portion  of 
the  said  funds  in  any  year  untU  the  reports  of  number,  salaries  and  quali- 
fications of  teachers  employed  and  aggregate  days  of  attendance  of  pupils* 
have  been  made  as  required  by  law.    The  local  school  tax  collected  from 
the  several  districts  or  parts  of  districts  in  the  county  shaU  be  paid  to 
the  districts  from  which  it  was  collected.   Money  received  from  the  state 
on  account  of  interest  on  the  common  school  fund  shall  be  apportioned 
to  the  school  districts  and  parts  of  districts  within  the  territory  designated 
by  the  auditor  of  state  as  entitled  thereto  on  the       same  basis  on  which 
the  state  common  school  fund  is  distributed.    Seventy-five  per  centum  of 
the  amount  of  such  interest  so  apportioned  to  any  school  district  or  of 
the  amount  of  income  from  school  lands  apportioned  thereto  in  any 
year  shall  be  deducted  from  the  amount  of  the  apportionment  of  the 
state  common  school  fund  which  such  district  would  otherwise  be  enHtled 
to  receive  and  the  amount  so  deducted  shaU  be  added  to  the  amount  of 
such  fund  apportionable  among  the  remaining  school  districts  and  parts 
of  districts  entitled  to  share  in  the  apportionment  of  such  fund  in  the 
county  in  proportion  to  their  respective  shares  in  that  fund:  but  such 
deduction  and  addition  slmll  not  exceed  the  amount  of  the  state  common 
school  fund  which  such  district  would  otherwise  be  entitled  to  receive. 
All  other  money  in  the  county  treasury  for  the  support  of  common 
schools  and  not  otherwise  appropriated  by  law,  shall  be  apportioned  an- 
nually in  the  same  manner  as  the  state  common  school  fund. 

'  Sec.  7600-T.  In  cases  in  which  any  school  funds  are  required  to  be 
distributed  or  apportioned  to  parts  of  school  districts  on  the  basis  of 
number  of  teachers  employed  and  aggregate  attendance  of  fupUs,  the 


144 


shares  of  such  parts  of  distrkts  shall  be  ascertained  by  taking  the  total 
enrollment  of  pupils  residing  in  such  parts  of  districts-and  comparma 
such  enrollment  with  the  total  enrollment  of  pufiU  m  the  entire  school 
districts;  the  proportion  thus  obtained  shall  be  applied  to  the  number  of 
teachers  employed  in  each  whole  school  district  and  the  aggregate  days 
of  attendance  of  pupils  in  each  whole  school  district,  respectively  and 
the  result  shall  be  considered  the  number  of  teachers  employed  in  such 
iHirts  of  districts  and  the  aggregate  days  of  attendance  of  pupils  therein 
respectively.  "     '  ^  *^  .  > 

Sec.  7603.    The  certificate  of  apporticwiment  furnished  by  the  county 
auditor  to  the  treasurer  and  clerk  of  each  school  district  must  exhibit  the 
amount  of  money  received  by  each  district  f  romj  the  state,  the  amount  re- 
ceived from  any  special  tax  levy  made  for  a  particular  purpose,  and  the 
amount  received  from  local  taxation  of  a  general  nature.    The  amount 
received  from  the  state  *  *  *  and  the  proceeds  of  the  levy  retained  in 
the  county  under  section  seven  thousand  five  hundred  and  seventy-fwe  of 
the  General  Cade,  and  the  common  school  fund  shall  be  designated  the 
tuition  fund"  and  be  approfwiated  only  for  the  payment  of  superin- 
tendents and  teachers.   Funds  received  from  special  levies  must  be  desig- 
nated in  accordance  with  the  purpose  for  which  the  special  levy  was  made 
and  be  paid  out  only  for  such  purpose,  except  that,  when  a  balance  re- 
mams  m  such  fund  after  all  expenses  incident  to  the  purpose  for  which 
It  was  raised  have  been  paid,  such  balance  wiU  become  a  part  of  the  con- 
tingent fund  and  the  board  of  education  shall  make  such  transfer  by 
^uticm.  Funds  received  from  the  local  levy,  for  general  purposes  must 
be  deagnated  so  as  to  correspond  to  the  particular  purpose  for  which  the 
levy  was  made.    Moneys  coming  from  sources  not  enumerated  herein 
shall  be  placed  in  the  contingent  fund. 

Sec.  7613.  In  any  school  district  having  a  bonded  indebtedness,  for 
the  payment  of  which,  with  interest,  no  provisiwi  has  been  made  by  a 
special  tax  levy  for  that  particular  purpose,  the  board  of  education  of 
such  district  annually,  on  or  before  the  thirty-first  day  of  August,  shall 
set  aside  frcmi  its  revenue  a  sum  *  ♦  *  sufficient  in  amount  to  provide  a 
smkktg  fund  for  the  retirement  of  such  indebtedness  together  with  a 
sum  sufficient  to  pay  the  annual  interest  thereon. 

Sec.  7736.  Such  tuition  shall  be  paid  from  either  the  tuition  or  the 
contingent  funds  and  the  amount  per  capita  must  be  ascertained  by 
dividing  the  total  expenses  of  oMiducting  the  dementary  scluxAs  of  the 
district  attended,  exclusive  of  permanent  improvements  and  repairs,  by 
the  total  enrollment  in  the  elementary  schools  of  the  district,  such  amount 
to  be  cmnputed  by  the  month.  In  computing  such  total  expenses  of  con- 
ducting the  elementary  school  of  such  district,  the  amount  of  the  state 


145 


common  school  fund  and  the  proceeds  of  the  state  school  levy  retained 
»if  the  county,  apportioned  to  such  district  on  account  of  teachers  em- 
•ployed  m  such  elementary  schools,  and  the  amount  of  such  funds  appor- 
iioned  thereto  on  account  of  aggregate  days  of  attendance  of  pupiU  shaU 
'be  deducted  from  the  gross  expenses  of  conducting  such  schooU.  An 
attendance  any  part  of  a  month  will  create  a  liaWlity  for  the  whole  month. 

Sec.  7747.  The  tuition  of  pupils  who  are  eligible  for  admission  to 
high  school  and  who  reside  in  rural  districts,  in  which  no  high  school  is 
maintained,  shall  be  paid  by  the  board  of  education  of  the  sdio(ri  district 
m  which  they  have  legal  school  residence,  such  tuition  to  be  computed 
by  the  month.  An  attendance  any  part  of  the  month  shall  create  a  liabil- 
ity for  the  entire  month.  No  niore  shall  be  charged  per  capita  than  the 
amount  ascertained  by  dividing  the  total  expenses  of  conducting  the  high 
school  of  the  district  attended,  exclusive  of  permanent  improvements  and 
repair,  by  the  average  monthly  enrollment  in  the  high  school  of  the  dis- 
trict. 

In  computing  such  total  expenses  of  conducting  such  high  school  the 
amount  of  the  state  common  school  fund.and  the  proceeds  of  the  state 
scHool  levy  retained  in  the  county,  apportioned  to  such  district  on  account 
or  teachers  employed  in  such  high  school,  and  the  amount  of  such  funds 
apporttoned  thereto  on  account  of  aggregate  days  of  attendance  of  pupils 
shaUbe  deducted  from  the  gross  expenses  of  conducting  such  schools. 
The  district  superintendent  shall  certify  to  the  Munty  superintendent 
each  year  the  names  of  all  pupils  in  his  supervision  district  who  have 
con*plet6d  the  elementary  school  work,  and  are  eligible  for  admission  to 
high  school.  The  county  superintendent  shall'  thereupon  issue  to  each 
pupil  so  certified  a  certificate  of  promotion  which  shall  entitle  the  holder 
to  admission  to  any  high  school.  Such  certificates  shall  be  furnished  by 
the  superintendent  of  public  instruction. 

Sec.  7751.  Such  tuition  shall  be  paid  from  eittier  the  tnitim  or 
contmgent  funds  and  when  the  board  of  education  deems  it  necessary 
it  may  levy  a  tax  *  ♦  *  for  *  *  *  such  purposes.  The  proceeds  of  such 
levy  shaU  be  kept  m  a  separate  fund  and. applied  to  the  payment  of  such 
tuition. 

Sec.  yySy.  The  board  of  education  of  each  district  shall  make  a  re- 
port to  the  county  auditor,  on  or  before  the  first  day  of  September  in 
each  year,  containing  a  statement  of  the  receipts  and  expenditures  ef  tfie 
board,  the  number  of  schools  sustained,  the  length  of  time  they  were 
sustained,  the  enrollment  of  pupils,  the  average  monthly  enrollment  and 
average  daily  attendance,  the  aggregate  days  of  attendance  of  pupils 
the  nimiber  and  qualifications  of  teachers  employed,  and  their  salaries  the 
number  of  school-houses  and  school  rooms,  and  such  other  items  as'  the 
supenntendent  of  public  instruction  requires. 


The  board  af  educoHon  af  a  school  district  situated  in  two  or  more 
counHes  shall  also  report  the  enrollment  of  pupils  residing  in  each 
comity;  and  the  board  of  education  of  a  school  district  situated  partly  in 
an  original  surveyed  township  or  other  district  of  country  entitled  to 
an  apportionment  of  the  interest  on  the  common  school  fund  or  to  a 
dividend  of  the  rents  and  profits  of  school  lands  shall  report  the  enroU- 
ment  of  pupils  residing  in  such  original  surveyed  township  or  district  of 
country. 

The  aggregate  days  of  attendance  of  pupils  in  a  school  which  is 
•  dosed  for  more  than  five  consecutive  school  days  during  the  year  on 
account  of  an  epidemic  of  disease  or  other  emergency  requiring  such 
closing  shall  be  ascertained  by  multiplying  the  average  daily  attendance 
at  such  school  by  the  number  of  days  such  school  would  have  been  in 
session,  but  for  such  emergency. 

When  a  school  district  is  situated  in  two  or  more  counties,  the  re- 
ports required  by  law  shall  be  made  to  the  auditor  of  each  county. 

Sec.  2.  Said  original  sections  5649-3a,  5649-4,  7575,  75^2,  7587, 
7595,  7596,  7597,  7600,  7603,  7613,  7736,  7747,  7751  and  7787  of  the 
^eral  Code  and  sections  3204,  7594-1,  7595-1,  7595-2,  7595-3,  7595-4, 
70Q2,  7804,  7924,  7925,  7926,  7927,  7927a,  7927b,  7928,  7929,  and  7986 
of  the  General  Code  are  hereby  repealed. 

Section  3.  This  Act  shall  take  effect  upon  and  with  respect  to  the 
making  of  tax  levies  for  the  year  nineteen  hundred  and  twenty-one  on 
the  tax  list  made  up  in  the  year  nineteen  hundred  and  twenty,  and  all 
official  acts  with  respect  to  such  tax  levies  shall  be  governed  thereby. 
This  Act  shall  not  affect  the  distribution  of  state  aid  to  weak  school  dis- 
tricts for  any  part  of  the  school  year  ending  in  the  year  nineteen  hundred 
and  twenty  nor  the  amount  of  tuition  payable  by  one  school  district  to 
another  for  any  part  of  such  year,  nor  the  distribution  of  income  from 
school  lands  or  interest  on  the  common  school  fund  for  and  on  account 
of  such  school  year,  nor  the  collection  and  distribution  of  taxes  levied 
on  the  tax  list  current  when  it  takes  effect,  nor  the  inclusion  in  or  exclu- 
sion from  the  limitation  on  the  combined  maximum  rate  for  all  taxes 
levied  in  a  taxing  district  of  any  levy  for  any  purpose  other  than  such 
purposes  as  with  respect  to  which  section  5649-4  of  the  General  Cotle  is 
herein  expressly  amended. 


83D  General  Assembly, 
liEGULAR  Session,  1919, 

THE  SPECIAL  JOINT  COMMITTEE  ON  TAXATION. 

A  BILL 

Providing  for  levying  and  collecting  an  annual  tax  on  the  net  incomes  of 
persons  residing  in  this  state  and  for  that  purpose  enacting  Chapter 
1«  of  Title  I,  Part  Second  of  the  General  Code  of  Ohio,  consisting 
of  supplemental  sections  5773-1  to  5773-42  inclusive  thereof,  amend- 
ing section  6778-1  of  the  General  Code  and  repealing  section  1  of 
the  act  of  May  10,  1910,  101  O.  L.  399,  designated  as  section  5445 
of  the  General  Code. 

Be  it  enacted  by  the  General  Assembly  of  the  State  of  Ohio: 

Section  i.  Chapter  16  of  Title  I,  Part  Second  of  the  General  Code 
of  Ohio,  consisting  of  sections  5773-1  to  5773-42,  inclusive,  is  hereby 
enacted  as  follows : 

Chapter  16. 

INCOMES  OF  PERSONS. 

-     Sec.  5774-1-  For  the  purpose  of  this  chapter  and  unless  otherwise 
required  by  the  context: 

( 1 )  The  word  "conunission"  means  the  tax  commission  of  Ohio. 

(2)  The  word  "taxpayer"  includes  any  person,  trust  or  estate  sub- 
ject to  the  tax  imposed  by  this  chapter,  or  whose  income  is  in  whole  or 
in  part  subject  to  the  tax  imposed  by  this  chapter  and  does  not  include 
corporations. 

(3)  The  words  "mihtary  or  naval  forces  of  the  United  States", 
mclude  the  marine  corps,  the  coast  guard,  the  army  nurse  corps,  female, 
and  the  navy  nurse  corps,  female,  but  this  shall  not  be  deemed  to  ex- 
clude other  units  otherwise  included  within  such  woMs. 

(4)  ^  The  words  "taxable  year"  mean  the  calendar  year,  or  the  fiscal 
year  ending  during  such  calendar  year,  upon  the  basis  of  which  the  net 
income  is  computed  under  this  chapter. 

The  words  "fiscal  year"  mean  an  accounting  period  of  twelve  months 
ending  on  the  first  day  of  any  month  other  than  December. 

(5)  The  word  "fiduciary"  means  a  guardian,  trustee,  executor, 
administrator,  receiver,  or  any  person  whether  individual  or  corporate, 
acting  in  any  fiduciary  capacity  for  any  taxpayer. 


S.  B.  NO.  196 


147 


(6)  The  word  "paid"  for  the  purpose  of  the  deductions  and  ex- 
emptions under  this  chapter  meaiis  "paid  or  accrued"  or  "paid  or  in- 
curred", and  the  terms  "paid  or  incurred"  and  "paid  or  accrued"  shall 
be  construed  according  to  the  method  of  accounting  upon  the  basis  of 
which  the  net  income  is  computed,  under  this  chapter.  The  term  "re- 
ceived" for  the  purpose  of  the  computation  of  net  income  under  this 
chapter,  means  "received  or  accrued"  and  the  term  "received  or  accrued" 
shall  be  according  to  the  method  of  accounting  upon  the  basis  of  which 
the  net  income  is  computed  under  this  chapter. 

(7)  The  word  "resident"  applies  only  to  natural  persons  and  in-* 
eludes  for  the  purpose  of  determining  liability  to  the  tax  imposed  by 
this  chapter  upon  or  with  reference  to  the  income  of  any  taxable  year, 
any  person  who  shall,  at  any  time  within  the  first  six  months  of  the  next 
succeeding  year,  be  or  become  a  resident  of  the  state. 

(8)  The  word  "dividend"  means  any  distribution  made  by  a  cor- 
poration out  of  its  earnings  or  profits  to  its  shareholders  or  members, 
whether  in  cash  or  in  other  property,  excepting  stock  of  the  corpor^ticm. 

(9)  The  words  "foreign  cotmtry"  or  "foreign  government"  mean 
any  jurisdiction  other  than  one  ^braced  within  the  United  States.  The 
words  "United  States"  include  the  states,  the  territories  of  Alaska  and 
Hawaii  and  the  District.of  Columbia. 

(10)  The  term  "net  income"  means  the  gross  income  of  a  taxpayer 
computed  according  to  the  provisions  of  this  chapter,  less  the  deductions 
herein  allowed. 

The  definitions  set  forth  in  Chapter  i  of  this  title  shall  not  apfdy 
for  ^  ptuposes.of  tfiis  chapter.  ^ 

Sec.  5773-2.  An  annual  tax  is  hereby  levied  upon  the  net  income  of 
every  resident  of  this  state,  at  the  rate  of  one  per  centum  of  the  first  four 
thousand  dollars  of  such  net  income  as  defined  in  this  chapter,  over  and 
above  the  exemptions  herein  provided  for,  and  two  per  centum  of  the 
remainder,  if  any,  of  siich  net  inomie.  Seventy-five  per  centum  of  such 
tax  shall  be  for  the  use  of  the  general  revenue  fund  of  the  mtmicipal 
oorporatioa  1^  township  in  which  the  same  originates,  as  defined  in  this 
diapter,  ilHf  the  remainder  thereof  shall  be  for  the  use  of  the  general 
revenue  of  the  state. 

Sec.  5773-3.  The  net  income  shall  be  computed  upon  the  basis  of 
the  taxpayer's  annual  accounting  period  (fiscal  year  or  calendar  year  as 
die  cue  may  be)  in  accordance  with  die  method  of  accoonting  r^^ulariy 
enjoyed  in  keeping  the  books  of  such  taxpayer.  But  if  no  such  method 
of  accounting  has  been  so  employed,  or  if  the  method  employed  does  not 
clearly  reflect  the  income,  the  computation  shall  be  made  upon  such  basis 
and  in  such  manner  as  in  the  opinion  of  the  commission  does  dearly  re- 


»49 

dect  the  inamie:  If  the  taxpayer's  annual  accounting  period  is  other  than 
a  fiscal  year  as  defined  in  this  chapter,  or  if  the  taxpayer  has  no  annual 
accounting  period  or  does  hot  keep  books,  the  net  income  shall  be  com- 
puted on  the  basis  of  the  calendar  year. 

If  a  taxpayer  changes  his  accounting  period  from  fiscal  year  to  calen- 
dar year,  from  calendar  year  to  fiscal  y6tr,  or  from  one  fiscal  year  to 
another,  the  net  income  shall,  with  the  approval  of.  the  commission,  be 
computed  on  the  basis  of  such  new  accounting  period,  subject  to  the 
further  provisions  of  this  chapter. 

Sec.  5773-4.   The  term  "gross  income" : 

(a)  Includes  gains,  prc^ts  and  income  derived  from  salaries,  wages 
or  compensation  for  personal  service,  of  whatevier  kkul  and  in  whatever 
form  paid,  or  from  profesMons,  vocations,  trades,  business,  commerce  or 
sales  or  dealings  in  property,  whether  real  or  personal,  growing  out  of 
the  ownership  or  use  of  or  interest  in  such  property ;  also  from  interest, 
rent,  dividends,  securities,  or  the  transaction  of  any  business  carried  on 
for  profit,  or  gains  or  profits  and  income  derived  from  any  source  what- 
ever. The  amount  of  all  such  items  shall  be  included  in  the  gross  income 
for  the  taxable  year  in  which  received  by  the  taxpayer,  unless  under  the 
methods  of  accounting  permitted  in  this  chapter,  any  such  amounts  are 
to  be  properly  accounted  for  as  of  a  different  period ;  but 

(b)  Does  not  include  the  following  items  which  shall  be  exempt 
from  taxation  under  this  chapter: 

1.  The  proceeds  of  life  insurance  policies  and  contracts  paid  upon 
the  deatii  of  the  insured  to  individual  beneficiaries  or  to  the  estate  of  the 
iiisured. 

2.  The  amounts  received  by  the  insured  as  a  return  of  premium  or 
premiiiuns  paid  by  him  under  life  insurance,  endowment  or  annuity  con- 
tracts either  during  the  term  or  at  the  maturity  of  the  term  mentioned  in 
the  contract  or  upon  surrender  of  the  contract. 

3.  The  value  of  property  acquired  by  gift,  bequest,  devise  or  descent 
(but  the  income  from  such  property  shall  be  included  in  gross  income). 

4.  Interest  on  the  obligations  of  the  United  States  or  its  posses- 
sions ;  or  securities  issued  imder  the  provisions  of.  the  federal  farm  loan 
act  of  July  seventeen,  nineteen  hundred  and  sixteen ;  or  bonds  issued  by 
the  war  finance  corporation;  or  the  obligations  of  the  state  of  Ohio  or 

of  any  municipal  corporation  or  political  subdivision  thereof  heretofore 
issued;  provided,  that  every  taxpayer  owning  any  of  the  obligations, 
securities,  bonds  or  investments  enumerated  in  this  paragraph,  shall,  in 
the  return  required  by  this  chapter,  submit  a  statement  showing  the 
number  and  amount  of  such  obligations,  securities,  bonds  or  investments 


ISO 

etuinierated  in  this  paragraph,  and  the  income  received  therefrom,  m 
such  form  and  with  such  information  as  the  commission  may  require. 

5.  Any  amount  received  through  accident  or  health  insurance  or 
under  workmen's  compensation  acts,  as  compensation  for  death,  personal 
injuries  or  sickness,  plus  the  amount  of  any  damages  received  whether 
by  suit  or  agreement  on  account  of  such  injuries  or  sickness,  or  through 
the  war  risk  insurance  act  or  any  law  for  the  benefit  or  relief  of  injured 
or  disabled  members  of  the  military  or  naval  forces  of  the  United  States. 

6.  Pensions  received  from  the  United  States  or  from  the  state  of 
Ohio  or  any  subdivision  thereof. 

7.  Salaries,  wages  and  other  compensation  received  from  the  United 
States  by  officials  or  employes  thereof,  including  persons  in  the  military 
or  naval  forces  of  the  United  States. 

8.  Income  received  by  any  officer  of  a  religious  denomination  or 
by  any  institution,  or  trust,  for  moral  or  mental  improvement,  religious, 
Bible,  tract,  charitable,  benevolent,  fraternal,  missionary,  hospital,  in- 
firmary, educational,  scientific,  literary,  library,  patriotic,  historical  or 
cemetery  purposes,  or  for  the  enforcement  of  laws  relating  to  children 
or  animals,  or  for  two  or  more  of  such  purposes,  if  such  income  be  used 
exclusively  for  carrying  out  one  or  more  of  such  purposes;  but  nothing 
herein  shall  be  construed  to  exempt  the  fees,  stipends,  personal  earnings 
or  other  private  income  of  such  officer  or  trust. 

Sec.  5773-5.  For  the  purpose  of  ascertaining  the  gain  derived  or 
loss  sustained  from  the  ownership,  or  the  sale  or  other  disposition  of 
property,  real,  personal  or  mixed,  the  basis  shall  be  first,  the  fair  market 
price  or  value  of  such  property  as  of  the  first  day  of  the  third  taxable 
year  preceding  the  year  in  which  the  gain  or  loss  is  computed,  but  not 
prior  to  January  first,  nineteen  hundred  and  nineteen,  and  second,  in 
case  of  property  acquired  within  such  period  of  three  years  or  over  and 
after  said  date  ,the  cost  thereof;  unless  such  property  was  acquired,  in 
whole  or  in  part,  as  a  gift,  devise,  bequest  or  by  descent,  in  whidi  event 
such  basis  shall  be  the  fair  market  value  thereof  as  of  the  date  of 
acquisition;  but  if,  in  either  case,  an  inventory  has  been  made  in  a  pre- 
vious year  or  years  within  such  period,  under  authority  of  this  chapter, 
and  a  value  has  been  assigned  to  such  property  in  such  inventory  for 
the  purpose  of  computing  the  gross  income  of  such  year  or  years,  the 
basis  of  such  ascertainment  shall  be  such  inventory  value  so  ass^ed 
to  such  property  in  the  last  previous  year  in  which  such  inventory  has 
been  made  and  such  value  has  been  assigned. 

Whenever  a  gain  or  loss  is  ascertained  under  this  section  on  the 
basis  of  a  value  determined  as  of  a  date  more  than  one  year  prior  to 
the  first  day  of  the  taxable  year  in  which  such  gain  or  loss  is  computed. 


it  shall  be  conclusively  presumed  to  have  accrued  uniformly  during  the 
taxable  years  so  intervening,  and  the  taxpayer,  if  he  so  elect,  may  file 
returns  or  amended  returns  for  each  of  such  taxable  years,  in  which 
the  proportional  part  of  such  whole  gain  or  loss  so  attributable  to  such 
year  shall  be  shown ;  and  in  such  event  only  such  part  as  is  attributable 
to  the  year  in  which  the  omiputation  is  made  shall  enter  into  the  gross 
income  of  that  year  and  the  assessments  of  the  previous  3rear  or  years 
shall  be  corrected  accordingly  in  the  manner  provided  in  this  chapter  for 
the  correction  of  errors ;  and  if  no  such  assessments  have  been  made,  and 
the  returns  for  such  year  or  years  show  taxable  net  income,  or  if  the 
result  of  such  correction  is  to  increase  any  assessment  previously  made, 
an  assessment  of  such  net  income  or  increase  shall  be  made  at  the  rates 
respectively  applicable  to  such  year  or  years,  in  the  manner  provided 
in  this  chapter  for  assessing  omitted  taxable  incomes,  but  without  notice. 

Sec.  5773-6.  When  property  is  exchanged  for  other  property,  the 
property  received  in  exchange  shall  for  the  purpose  of  determining  gain 
or  loss  be  treated  as  the  equivalent  of  cash  to  the  amount  of  its  fair 
market  value,  if  any;  but  if  it  has  no  ascertainable  market  value,  then 
it  shall  be  treated  as  cash  to  the  amount  of  its  estimated  actual  value. 

Sec.  5773-7.  In  computing  net  income  there  shall  be  allowed  as 
deductions: 

1.  All  the  ordinary  and  necessary  expenses  paid  or  incurred  during 
the  taxable  year  in  carrying  on  any  trade  or  business,  including  a  rea- 
sonable allowance  for  salaries  or  other  compensation  for  personal  services 
actually  rendered,  and  including  rentals  or  other  payments  required  to 
be  made  as  a  condition  to  the  continued  use  or  possession,  for  purposes 
of  the  trade  or  business,  of  property  to  which  the  taxpayer  has  not  taken 
or  is  not  taking,  title  or  in  which  he  has  no  equity. 

2.  The  same  proportion  of  interest  paid  or  accrued  within  the  tax- 
able year  on  indebtedness  which  the  amount  of  gross  income,  as  herein 
defined,  bears  to  the  gross  amount  of  his  income  from  all  sources. 

3.  Taxes  paid  or  accrued  within  the  taxable  year,  imposed  by  or 
tmder  authority  of  this  State,  excepting  under  this  chapter,  or  by  the 
United  States,  or  any  of  its  possessions,  or  any  foreign  governmen,t  or 
by  any  other  state,  or  territory,  or  any  taxing  subdivision  of  this  or  any 
other  state  or  territory,  not  including  special  assessments  on  account  of 
local  benefits. 

4.  Losses  sustained  during  the  taxable  year  and  not  o^pensated 
for  by  insurance  or  otherwise,  if  incurred  in  trade  or  business  or  dis- 
closed by  the  inventory. 

5.  Losses  sustained  during  the  taxable  year  of  property  not  con- 
fleeted  with  ti^  pf  lt>nsi»^§  pr  n9t  disdosed  by  the  inventory  if  aris- 


IS2 

ing  from  fires,  storms,  shipwrecks,  or  other  casualty  or  Iran  theft,  and 
not  compensated  for  by  insurance  or  otherwise. 

6.  Dcbt^  due  the  tsuspaytr  and  ascertained  to  be  worthless  and 
charged  off  within  the  taxable  year. 

7.  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of 
property  used  in  the  trade  or  business  or  included  in  the  inventory  in- 
cluding a  reasonable  allowance  for  obsolescence. 

8.  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  dqxwits 
and  trniber,  a  reasonaWe  aUowance  for  depletion  and  for  depreciation 
of  uiq>rovciiicnts,  according  to  the  pecuKar  conditions  in  each  case,  based 
upon  cost  including  cost  of  development  not  otherwise  included ;  pro- 
vided, that  in  the  case  of  such  properties  acquired  prior  to  January  first, 
nmeteen  hundred  and  nineteen,  the  fair  market  value  of  the  propert)^ 
(or  the  taxpayer's  interest  therein)  on  that  date  shall  be  taken  in  lieu 
of  cost  up  to  that  date;  provided,  further,  tiiat  in  the  case. of  mines,  ofl 
and  gas  wells,  discovered  by  the  taxpayer  on  or  after  January  first,  nine- 
teen hundred  and  nineteen,  and  not  acquired  as  the  result  of  a  purchase 
of  a  proven  tract  or  lease,  where  the  fair  market  value  of  the  property 
IS  materially  disproportionate  to  the  cost,  the  depletion  allowance  shaU 
be  based  upon  the  fair  market  value  of  the  property  at  the  date  of  the 
discovers  pr  within  thirty  days  thereafter;  such  reasonable  altewance 
m  all  the  above  cases  to  be  made  under  rules  and  relations  to  be  pre- 
scribed by  the  commission.    In  the  case  of  leases  the  deduction  allowed 
by  this  paragraph  shall  be  equitably  apportioned  between  the  lessor  and 
lessee. 

9.  G>ntributions  or  gifts  made  within  the  taxable  year  to  or  for 
the  use  of  the  state  or  any  of  its  subdivisions  for  exclusively  public 
purposes  or  to  or  for  the  use  of  institutions  exclusively  for  religious, 
charitable,  scientific,  or  educational  purposes,  or  for  the  prevention  of 
cruelty  to  children  or  animals,  the  activities  of  which  are  carried  on  in 
whole  w  in  substantial  part  within  this  state,  and  no  part  of  the  earnings 
of  which  inures,  to  the  benefit  of  any  private  stockholder  or  individual, 
to  an  amount  not  in  excess  of  fifteen  per  centum  of  the  taxpayer's  net  in- 
come as  computed  without  the  benefit  of  this  paragraph.  Such  contribu- 
tions or  gifts  shall  be  allowed  as  deductions  only  if  rq)orted  under  rules 
and  regulations  prescribed  by  the  commission. 

Sec:  5773-8.    In  C(Hnputing  net  incmne  no  deduction  shall  in  any  case 
be  allowed  in  respect  of : 

1.  Personal,  living  or  family  expenses; 

2.  Any  amount  paid  out  for  new  buildings  or  for  permanent  im- 
provements or  betterments  made  to  increase  the  valu^  of  any  property 
or  estate ; 


3.  Any  amount  expended  in  restoring  property  or  in  making  good 
the  exhaustion  thereof  for  which  an  allowance  is  or  has  been  made ;  or 

4.  Premiums  paid  on  any  life  insurance  policy,  covering  the  life  of 
any  officer  or  employe,  or  of  any  person  financially  interested  in  any 
trade  or  business  carried  on  by  the  taxpayer,  when  the  taxpayer  is  directly 
or  indirecdy  a  benefidaiy  under  such  policy. 

5.  Any  expense  not  specifically  enumerate  in  the  next  preceding 
section. 

Sec.  5773-9.  The  following  exemptions  shall  be  allowed  to  any  tax- 
payer: 

1.  In  the  case  jof  a  single  person,  a  personal  exemption  of  five  hun- 
dred dollars,  or  in  tfie  case  of  the  head  of  a  family  or  a  married  person 
living  with  or  contributing  chiefly  to  the  support  of  husband  or  wife,  a 
personal  exemption  of  one  thousand  dollars.  A  husband  and  wife  living 
together  shall  receive  but  one  personal  exem'ption  of  one  thousand  dollars 
against  their  aggregate  net  income;  and  in  case  they  make  separate  re- 
turns, the  personal  exemptions  of  one  thousand  debars  may  be  taken  by 
either  or  divided  between  them. 

2.  Two  hundred  ddlars  for  eadi  person  (other  than  husband  or 
wife)  dependent  upon  and  receiving  his  chief  support  from  the  taxpayer, 
if  such  dependent  person  is  under  eighteen  years  of  age  or  is  incapable  of 
self-support  because  mentally  or  physically  defective. 

3.  A  taxpayer  receiving  a  salary,  wages,  or  other  compensation 
from  the  United  States  exempt  frwn  taxation  under  this  chapter  shall  be 
entitled  to  only  so  much  of  the  personal  exemption  imvided  for  in  this 
section  as  is  in  excess  of  the  aggregate  amount  of  such  salaries,  wages, 
or  other  compensation. 

Sec.  5773-10.  Individuals  carrying  on  business  in  partnerships  shall 
be  liable  for  income  tax  only  in  their  individual  capacity.  There  shall 
be  included  in  computing  the  net  income  of  each  partner  his  distributive 
share,  whether  distributed  or  not,  of  the  net  income  of  the  partnership 
for  the  taxable  year,  or,  if  his  net  income  for  such  taxable  year  is  com- 
puted upon  the  basis  of  a  period  different  from  that  upon  the  basis 
of  which  the  net  income  of  the  partnership  is  computed,  then  his  distribu- 
tive share  of  the  net  income  of  the  partnership  for  any  accounting  period 
of  the  partnership  ending  within  the  fiscal  or  calendar  year  upon  the 
basis  of  which  the  partner's  net  income  is  computed.  Taxpayers  who 
are  members  of  partn«^hips  may  be  required  by  the  commission  to 
make  a  return  stating  the  gross  receipts  and  net  gains  or  profits  of  the 
partnership  for  any  taxable  year.  The  net  income  of  the  partnership 
shall  be  computed  in  the  same  manner  and  on  the  same  basis  as  pro- 
vided in  computing  the  net  income  of  individuals  except  that  the  deduc- 


tions  provided  in  paragraph  nine  of  section  5733-7  of  the  General  Code 
shall  not  be  allowed  and  the  personal  exemptkms  provided  for  in  section 
5773-9  of  the  General  Code  shall  be  allowed  only  to  the  individual  part- 
ners. 

Sec.  5773-11-  The  tax  imposed  by  this  chapter  shall  apply  to  the 
income  of  estates  or  of  any  kind  of  property  held  in  trust,  including : 

1.  Income  received  by  estates  of  deceased  persons  during  the  period 
of  administration  or  settlement  of  the  estate ; 

2.  Income  accumulated  in  trust  for  the  benefit  of  unborn  or  unas- 
certained persons  or  person  with  contingent  interests; 

3.  Income  held  for  future  distribution  under  the  terms  of  the  will 
or  trust ;  and 

4.  Income  v^hich  is  to  be  distributed  to  the  beneficiaries  period- 
ically, whether  or  not  at  regular  intervals,  and  the  income  collected  by 
a  guardian  of  an  infant  to  be  held  or  distributed  as  the  court  may  direct. 

Sec.  5773-12.  The  net  income  of  an  estate  or  trust  shall  be  com- 
puted in  the  same  manner  and  on  the  same  basis  as  provided  in  this 
chapter  for  individual  taxpayers,  except  that  there  shall  also  be  allowed 
as  a  deduction  any  part  of  the  gross  income  which  pursuant  to  the  terms 
of  the  will  or  deed  creating  the  trust,  is  during  the  taxable  year  paid  to 
or  permanently  set  aside  for  the  state,  or  any  political  subdivision  thereof, 
for  exclusively  public  purposes  or  for  any  institution  used  exdusivdy 
for  religious,  charitable,  scientific  or  educaticmal  purposes  or  for  the 
IMwenticMi  of  cruelty  to  children  or  animals,  the  activities  of  which  are 
carried  on  in  whole  or  in  substantial  part  in  this  state,  and  no  part  of 
the  net  earnings  of  which  inures  to  the  benefit  of  any  private  stockholder 
or  individual ;  and  in  cases  under  paragraph  four  of  the  next  preceding 
section,  the  fidudiary  shall  make  return  as  provided  in  this  chapter,  in- 
cluding a  statement  of  each  beneficiary's  distributive  share  of  such  net 
inamie,  whether  or  not  distributed  before  the  dose  of  the  taxable  year 
for  which  the  return  is  made. 

In  cases  under  pargraphs  one,  two  and  three  of  the  next  preced- 
ing section,  the  tax  shall  be  imposed  upon  the  net  income  of  the  estate 
or  trust  and  shall  be  paid  by  the  fiduciary  except  that  in  determining  the 
net  income  of  the  estate  of  any  deceased  person  during  the  period  of 
administration  or  settlement  there  may  be  deducted  the  amount  of  any 
income  properly  paid  or  credited  to  any  legatee,  heir  or  other  4)eneficiary. 
In  such  cases,  the  estate  or  trust  shall  be  allowed  the  same  exemptions 
as  are  allowed  to  single  persons .  under  section  5773-9  of  the  General 
Code. 

In  cases  under  ])aragraph  four  of  the  next  preceding  section  and  in 
the  case  of  any  income  af  an  estate  during  the  period  of  administration 


IS5 

or  settlement  permitted  by  this  section  to  be  deducted  from  the  net  in- 
come upon  which  tax  is  to  be  paid  by  the  fiduciary,  the  tax  shall  not  be 
paid  by  the  fiduciary,  but  there  shall  be  included  in  computing  the  net 
income  of  each  beneficiary  his  distributive  share  whether  distributed  or 
not,  of  the  net  income  of  the  estate  or  trust  for  the  taxable  year,  or,  if 
his  net  income  for  such  taxable  year  is  computed  upon  the  basis  of  a 
period  different  from  that  upon  the  basis  of  which  the  net  income  of 
the  estate  or  trust  is  computed,  then  his  distributive  share  of  the  net 
income  of  the  estate  or  trust  for  any  accounting  period  of  such  estate 
or  trust  ending  within  the  fiscal  year  or  calendar  year  upon  the  basis 
of  which  such  beneficiary's  net  income  is  computed. 

Sec.  5773-13.  Every  taxpayer  having  a  fiet  income  for  the  taxable 
year  of  five  hundred  dollars  or  over  if  single  or  if  married  and  not  living 
with  husband  or  wife,  or  of  one  thousand  dollars  or  over  if  married 
and  living  with  husband  or  wife,  shall  within  forty  days  after  the  expira- 
tion of  the  taxable  year  make  under  oath  a  return  stating  specifically 
the  items  of  his  gross  income  and  the  deductions  and  exemptions  allowed 
by  this  chapter;  provided,  however,  that  the  county  auditor  may,  for 
good  cause,  extend  such  time  a  specified  number  of  days.  If  a  husband 
and  wife  livii^  together  have  an  aggregate  net  income  of  one  thousand 
dollars  or  over,  each  shall  make  such  a  return  unless  the  income  of  eacli 
is  included  in  a  single  joint  return.  If  the  taxpayer  is  unable  to  make 
his  own  return  the  return  shall  be  made  by  a  duly  authorized  agent  or 
by  the  guardian  or  other  person  charged  with  the  care  of  the  person  or 
property  of  such  taxpayer. 

Sec.  5773-14.  Every  partnership  shall  when  required  by  the  county 
auditor  of  the  county  wherein  any  partner  resides,  make  a  return  for 
any  taxable  year,  stating  specifically  the  items  of  its  gross  income  and 
the  deductions  allowed  by  this  chapter,  and  shall  include  in  the  return 
the  names  and  addresses  of  the  individuals  who  would  be  entitled  to 
share  in  the  net  income  if  distributed  and  the  amount  of  the  distributive 
share  of  each  individual. 

Sec  5773-15.  Every  fidudary  (except  receivers  appointed  by  au- 
thority of  law  in  possession  of  part  only  of  the  property  of  a  taxpayer) 
shall  make  under  oath  of  such  fiduciary,  if  a  person,  or  that  of  its  presi- 
dent or  secretary,  if  a  corporation,  a  return  of  the  amount  of  income 
received  by  the  estate  or  trust,  or  for  each  beneficiary,  stating  Fpecifica'.ly 
the  items  of  the  gross  income  and  the  deductions  and  exemptions  allowed 
by  this  chapter.  But  such  returns  need  not  be  made  in  cases  under 
paragraphs  one,  two  and  three  of  section  5773-11  of  the  General  Code 
unless  the  taxable  net  incxKme  of  the  estate  or  trust  is  five  hundred  d^^'- 
lars  or  over,  nor  in  cases  under  paragraph  four  of  said  section,  wlierein 


156 


the  entire  income  of  the  beneficiary  or  beneficiaries  from  all  sources  is 
received  and  administered  by  the  fiduciary,  unless  the  taxable  net  income 
of  each  beneficiary  is  five  hundred  dollars  or  over  if  single,  or  if  married 
and  not  living  with  husband  or  wife,  or  one  thousand  dollars  or  over  if 
married  and  living  with  or  contributing  chiefly  to  the  support  of  husband 
or  wife.  Under  such  regulations  as  the  commission  may  prescribe,  a 
return  made  by  one  of  two  or  more  joint  fiduciaries  and  filed  in  the  office 
of  the  proper  county  auditor  shall  be  sufficient  compliance  with  the  above 
requirement.  Such  return  shall  show  the  address  of  each  ben^ciary 
,  and  contain  a  statement  that  the  fiduciary  has  sufficient  knowledge  of 
the  affairs  of  such  beneficiary/  estate  or  trust  to  enable  him  to  make  the 
return  and  that  the  samejs,  to  the  best  of  his  knowledge  and  belief,  true 
and  ccMTect.  Fiduciaries  required  to  make  returns  or  statements  under 
thiis  chapter  shall  be  subject  to  all  the  provisions  of  this  chapter  which 
apply  to  taxpayers. 

Sec.  5773-16.  Whenever  in  the  opinion  of  the  commission  the  use 
of  inventories  is  necessary  in  order  clearly  to  determine  the  income  of 
any  taxpayer,  inventories  shall  be  taken  by  such  taxpayer  upon  such 
basis  as  the  commission  may  prescribe,  conforming  as  nearly  as  may 
be  to  the  best  accounting  practice  in  the  trade  or  business  of  the  tax- 
payer and  most  clearly  reflecting  his  income.  Any  taxpayer  may,  with 
the  approval  of  the  commission,  use  inventories  in  making  his  returns, 
and  compute  his  taxable  inccmie  upon  the  basis  of  such  inventories,  but 
the  form  of  such  returns  shall  be  prescribed  by  the  commissicm. 

Sec.  5773-17.  If  a  taxpayer,  with  the  approval  of  the  commission, 
changes  the  basis  of  computing  net  income  from  fiscal  year  to  calendar 
year,  a  separate  return  shall  be  made  for  the  period  between  the  close  of 
the  last  fiscal  year  for  which  return  was  made  and  the  following  Decem- 
ber thirty-first.  If  the  change  is  miade  from  calendar  year  to  fiscal  year, 
a  separate  return  shall  be  made  for  the  period  between  the  close  of  the 
last  calendar  year  for  which  return  was  made  and  the  date  designated  as 
the  close  of  the  last  fiscal  year.  If  the  change  is  from  one  fiscal  year  to 
another  fiscal  year,  a  separate  return  shall  be  made  for  the  period  between 
the  close  of  the  former  fiscal  year  and  the  date  designated  as  the  close 
of  the  new  fiscal  year.  If  a  taxpayer  making  his  first  return  for  in- 
come tax  keeps  his  accounts  on  the  basis  of  a  fiscal  year,  he  shall  make  a 
separate  return  for  the  period  between  the  beginning  of  a  calendar  year 
in  which  such  fiscal  year  ends  and  the  end  of  such  fiscal  year. 

In  all  of  the  above  cases  the  net  income  shall  be  computed  on  the 
basis  of  such  period  for  which  s^rate  return  is  made,  and  the  tax  shall 
1»e  paid  thereon  at  the  rate  for  the  calendar  year  in  which  such  ix?riod  is 
iiuhu'ed;  and  the  exemptions  allowed  in  this, article  shall  be  reduced 


157 

respectively  to  amounts  which  bear  the  same  ratio  to  the  full  exempticms 
provided  for  as  the  number  of  months  in  sudi  period  bears  to  twelve 
months. 

ADMINISTRATION. 

Sec.  5773-18.  The  commission  may  designate  such  of  its  examiners, 
experts,  accountants  and  other  assistants  as  it  may  deem  necessary  for 
the  purpose  of  aiding  in  the  administration  of  the  provisions  of  this  chap- 
ter, which  shall  be  deemed  and  held  to.be  a  law  which  the  coiranission  is 

required  to  administer  for  the  purpose  of  sections  1465-9,  1465-12  to 
1465-30  inclusive,  1465-32  and  1465-34  of  the  General  Code.  It  shall  be 
the  duty  of  the  commission  in  the  administration  of  this  chapter  to  super- 
'  vise  the  work  of  the  county  auditors  to  the  end  that  a  uniform  and  effec- 
tive enf<H!tem^t  of  this  chaffer  may  be  secured. 

Sec.  577^-19.  Eeach  county  auditor  shall  obey  the  orders  and  in- 
structions of  the  commission,  and  make  such  reports  to  the  commission 
as  the  commission  may  direct.  He  shall  have  all  the  ix)wers  of  an  agent 
of  the  commission  for  the  purpose  of  administering  the  provisions  of  this 
chapter  without  the  necessity  of  appointment  as  such. 

5773-^*  Each  county  auditor  shall  ai^)oint  sudi  number  of 
deputies  and  other  assistants  for  the  purposes  of  this  chapter  and  shall 
employ  such  clerks  for  such  purposes  as  the  commission  may  authorize, 
who  shall  severally  receive  such  compensation  as  the  commission  may  fix 
in  the  order  authorizing  such  appointments  or  employments,  which  shall 
be  subject  to  change  at  the  discretion  of  the  commission.  The  aggregate 
amount  of  compensation  so  fixed  shall  be  a  charge  of  the  fee  fund  of  the 
county  auditor,  notwithstanding  the  failure  of  the  county  commissioner 
to  make  an  allowance  or  appropriatimi  therefor. 

Sec.  5773-21.  Whenever  in  the  judgment  of  the  county  auditor  the 
income  of  any  person  in  his  county  shall  be  subject  to  tax  under  this 
chapter,  he  shall  require  such  person  to  make  report  of  such  time  and  in 
such  manner  and  form  as  the  commission  may  prescribe  specifying  par- 
ticularly the  amount  of  income  received  by  himself,  the  amount  of  income 
received  by  his  wife  and  each  minor  child  residing  with  him  as  members 
of  his  family  and  such  other  information  as  the  commission  may  deem 
necessary  to  enforce  the  provisions  of  this  chapter. 

Sec.  5773t22.  Each  taxpayer  shall  make  the  return  required  hy 
this  chapter  to  the  cotinty  auditor  of  ,the  county  wherein  he  resides. 
Each  fiduciary  in  cases  under  paragraphs  one,  two  and  three  of  section 
5773-11  of  the  General  Code  shall  make  the  return  requiret!  by  this 

chapter  to  the  county  auditor  of  the  county  wherein  lie  resides,  if  a 
person,  or  wherein  its  principal  place  of  business  in  this  state  is  located. 


IS8 

if  a  corporation.  Each  fiduciary  in  cases  under  paragraph  four  of  sec- 
tion 5773-11  of  the  General  Code  and  every  person  making  a  return 
for  any  taxpayer  shall  make  the  return  required  by  this  chapter  to  the 
county  auditor  wherein  the  taxpayer  resides;  provided,  that  in  such 
cases  in  which  a  fiduciary  is  a(kninisterii^  a  trust  for  the  benefit  of  two 
or  more  taxpayers  residing  in  different  counties  such  return  may  be  made 
in  either  of  such  counties. 

Sec.  S77Z~^Z'  A  fiduciary  applying  to  a  court  having  jurisdiction 
for  a  discharge  from  his  trust  and  a  final  settlement  of  his  accounts, 
before  his  application  shall  be  granted,  shalt  file  with  the  county  auditor 
of  the  proper  county  a  return  of  all  inc(Mne  received  in  his  representative 
capacity  during  the  time  between  the  last  preceding  January  first  and  the 
date  of  his  application  for  discharge  and  also  similar  returns  of  income 
received  during  each  of  the  three  next  preceding  calendar  years  as  have 
not  theretofore  been  filed.  Upon  the  receipt  of  such  returns,  the  county 
auditor  shall  immediately  determine  the  amount  of.  income  tax  due  or 
to  become  due  from  such  fiduciary  and  certify  the  amount  or  amounts 
to  the  court  in  which  the  application  for  the  discharge  is  pending  and 
the  court  shall  make  such  order  or  direction  as  is  necessary  to  provide 
for  the  payment  thereof  at  the  time  of  entering  final  judgment. 

Sec.  5773-24.  From  returns,  reports  or  statements  made  to  him, 
or  from  any  other  facts  or  information  coming  to  his  knowledge,  each 
county  auditor  shall  determine  the  taxable  net  income  of  each  taxpayer 
residing  in  his  county  and  of  e^ch  estate  or  trust  the  tax  imposed  on  the 
income  of  which  is  to  be  paid  by  a  fiduciary  residing  or  having  a  principal 
place  of  business  in  his  county,  and  shall  compute  the  taxes  thereon  levied 
by  this  chapter.  He  shall  make  in  duplicate  separate  alphabetical  lists 
of  names  of  taxpayers  for  each  municipality  and  township  in  his  county 
or  in  which  any  one  of  two  or  more  joint  fiduciaries  one  of  whom  has 
made  return  or  report  to  him  resides  or  has  its  principal  place  of  business. 
Opposite  each  name  on  each  of'  such  lists  he  shall  place  the  taxable  net 
income  and  the  amount  of  tax  as  assessed  by  him.  The  originals  of 
«uch  lists  he  shall*  place  on  file  in  his  office  or  certify  to  the  county  auditor 
of  any  other  county  to  which  such  lists  pertain,  on  or  before  the  first 
Monday  in  April  annually,  as  to  net  incomes  based  on  a  taxable  year 
endinsT  between  the  first  day  of  July  and  the  first  day  of  January,  inclu- 
sive of  the  latter;  and  on  or  before  the  first  Monday  in  October,  as  to 
Fuch  income  based  on  a  taxable  year  ending  at  any  other  time ;  provided, 
t^at  any  assessment  of  net  income  not  completed  in  time  to  be  so  listed, 
or  the  collection  of  the  taxes  on  which  is  stayed  as  provided  in  this 
rluipter,  sbaH  be  placed  on  the  list  first  made  up  after  the  impediment 
is  removed  at  the  rate  belonging  to  the  taxable  year  for  which  the 


assessment  is  made.  The  duplicate  lists  3hall  also  be  certified  at  such 
times  to  the  county  auditor  of  such  other  counties  as  to  whk:h  such 
originals  are  certified.  Each  county  auditor  shall  certify  all  duplicate 
lists  in  his  possession  to  the  county  treasurer  on  or  before  the  second 
Monday  in  May  and  on  or  before  the  second  Monday  in  November,  as 
the  treasurer's  duplicate  of  income  taxes. 

Any  taxpayer  may,  at  the  time  he  makes  his  return  as  provided  in 
this  chapter,  pay  to  the  county  auditor  the  tax  on  his  taxable  net  income 
as  disclosed  thereby,  and  the  county  auditor  may  accept  such  payment, 
without  prejudice  to  his  power  to  assess  such  taxable  net  income  at 
an  amount  in  excess  of  that  so  disclosed  and  to  charge  the  diflFerence 
between  the  amount  paid  and  the  amount  assessed  on  the  tax  list  and 
duplicate  as  provided  in  this  section.  No  charge  shall  be  made  on  the 
income  tax  list  and  duplicate  in  respect  of  any  tax  received  tmder 
authority  of  this  paragraph  but  the  county  auditor  shall  certify  the  money 
so  collected  into  the  county  treasury  to  the  credit  of  the  undivided  tax 
funds  therein,  specifying  the  municipal  corporation  or  township  in  which 
the  tax  originated,  and  such  money  shall  be  included  in  the  next  semi- 
annual settlement  and  distribution  as  provided  in  this  chapter. 

Sec.  5773-25.  In  case  any  partnership  return  or  statement  or  any 
return  or  statement  made  by  a  fiduciary  or  other  person  acting  for  a  tax- 
payer discloses  to  the  county  auditor  to  whom  it  is  made  the  «dstence 
of  net  income  of  a  taxpayer  residing  in  another  county,  such  county 
auditor  shall  determline  the  amount  of  such  net  income  so  disclosed,  and 
certify  the  same,  together  with  copies  of  so  much  of  the  return  or  state- 
ment and  any  other  facts  and  information  in  his  possession  reflecting 
upon  such  amount,  to  the  county  auditor  of  the  county  wherein  the  tax- 
payer resides,  for  the  use  of  such  last  mentioned  county  aivlitor  in  com- 
puting the  taxable  net  income  of  such  taxpayer. 

Sec.  5773-26.  In  case  the  county  auditor  assesses  the  taxable  net 
income  of  a  taxpayer  in  an  amount  in  excess  of  that  set  forth  in  any  re- 
turn voluntarily  made  under  oath,  he  shall  send  a  statement  thereof, 
specifying  .the  amotmt  of  the  increase  by  first-class  mail  to  the  taxpayer 
or  fiduciary  making  the  return  at  the  address  given  therein. 

Sec.  5773-27.  Any  taxpayer  feeling  himself  aggrieved  by  the  assess- 
ment of  his  taxable  net  income  may  appealHflHH^  to  the  ctMnmon 
pleas  court  of  the.  county  wherein  the  collectmHBto  be  made.  Such 
appeal  shall  be  perfected  by  giving  bond  to  the  county  auditor,  with  surety 
to  the  satisfaction  of  such  auditor  in  double  the  amount  of  the  taxes  as- 
sessed, but  not  less  than  fifty  dollars  in  any  case  conditioned  for  the  per- 
formance of  the  decree  and  the  payment  of  any  costs  which  may  be  ad- 
judged against  him,  and  by  filing  a  petition  in  such  court ;  provided,  how- 


ever,  that  fiduciaries  who  have  given  bond  according  to  law,  appeaiing 
on  their  own  behalf  or  on  behalf  of  a  beneficiary  who  is  not  omipetent 
to  appeal,  shall  not  be  required  to  give  such  bond.  Sudi  petition  shall  set 
forth  the  amount  of  taxaUe  net  income  if  any  which  the  appellant  con- 
cedes to  be  I^^y  assessable,  and  the  amount  of  taxes  conceded  to  be 
payaUe  thereon,  and  tender  payment  of  the  latter.   Such  appeal  may  be 
perfected  not  later  than  the  first  Monday  in  May  of  any  year  as  to  assess- 
ments certified  in  April ;  and  not  later  than  the  first  Monday  in  November 
as  to  other  assessments.   Thereupon  a  writ  shall  issue  commanding  the 
county  auditor  who  made  the  assessment,  or  his  successor  in  office,  within 
ten  days  thereafter  to  file  with  the  clerk  of  such  court  the  original  return, 
nqxMt  or  statement  of  the  taxpayer  or  fiduciary,  together  with  all  other 
papers  and  memoranda  in  his  office  bearing  in  any  way  upon  the  assess- 
ment.  Upon  the  trial  of  the  cause  the  averments  of  the  petition  shall  be 
deemed  to  be  in  issue  without  answer  and  the  assessmjent  as  made  shall 
be  deemed  prima  facie  correct  Costs  adjudged  against  the  county  auditor 
shall  be  paid  in  the  manner  prescribed  by  section  five  thousand  seven  hun- 
dred of  the  General  Code,  excepting  that  such  costs  shall  be  a  charge 
against  the  state's  share  of  the  reventie  arising  under  this  chapter  only. 
The  ranedy  provided  by  this  section  shall  be  in  lieu  of  all  other  proceed- 
ings to  contest  the  amount  of  such  taxes  or  to  recover  them  back  when 
paid. 

Sec.  577S'2S.  Appeals  under  the  next  preceding  sectkm  shall  be 
given  precedence  on  the  docket  of  the  common  jJeas  court  and  heard 
and  determined  pnMiq>tly,  to  the  end  ihsA,  if  practicaWe  all  such  appeals 
shtU  be  di^x>sed  of  prior  to  the  next  succeeding  collection  period. 

Sec.  5773-29.  An  appeal  under  this  chapter  shall  stay  proceedings 
for  the  collection  of  the  tax  appealed  from.  The  commissiogti  and  the 
county  auditor  shall  be  parties  to  the  appeal.  If  the  court  finds  that  the 
taxable  net  income  is  greater  in  amount  than  that  conceded  in  the  petition, 
the  decree  shall  include  m  the  amount  of  tax  assessed  interest  thereon  at 
the  rate  for  any  period  of  time  that  may  have  elapsed  between  the 
latest  date  at  which  the  tax  would  have  been  payable,  if  no  appeal  had 
been  taken,  and  the  date  of  the  decree.  The  county  auditor  shall  correct 
the  income  tax  lists  and  duplicate  in  the  manner  provided  in  this  chapter 
if  necessary  in  order  to  comply  with  the  decree. 

Sec.  5773-3a  The  county  treasurer  shall  collect  the  taxes  charged 
on  the  dujdicates  certified  to  him  under  this  chapter  at  the  next  period 
for  the  collection  of  taxes  assessed  on  personal  property,  and  in  the  same 
manner  as  such  personal  property  taxes  are  collected,  excepting  that  the 
entire  amount  of  taxes  under  this  chapter  shall  be  due  and  payable  at  one 
time.   In  making  such  collection,  the  county  treasurer  shall  have  and  ex- 


161 

erase  all  the  powers,  duties  and  remedies  in  him  vested  or  imposed  by 
law  for  the  collection  of  such  personal  property  taxes ;  provided,  however, 
that  the  treasurer's  power  to  proceed  by  distress  or  otherwise  shall  arise 
immediately  at  the  dose  of  the  coUection  p«iod  herein  referred  to. 

Sec.  5773-31-  The  county  auditor  shall  have  and  exercise  with  re- 
tpect  to  taxes  delinquent  under  the  provisions  of  this  chapter,  the  powers 
and  duties  provided  for  in  section  five  thousand  six  hundred  ninety-four 
of  the  General  Code,  to  be  exercised,  however,  immediately  after  such 
semi-annual  settlement,  instead  of  annuaUy,  as  therein  provided.  He  shall 
certify  the  delinquent  list  made  up  after  the  February  settlement  <m  tfie 
fifteenth  day  of  Maitfa,  annually. 

Sec.  5773-32.  At  eadi  semi-annual  settlement  period  the  revenue 
arising  under  this  chapter  shall  be  distributed  to  the  state  and  to  the  sev- 
eral townships  and  municipalities  therein  in  the  proportions  fixed  by  this 
chapter  in  the  same  manner  as  personal  property  taxes  are  distributed, 
excepting  that  all  fees  shall  be  deducted  from  the  state's  share  of  the 
revenue. 

Sec.  5773-33-  The  taxes  collected  under  this  chapter  shall  be  deemed 
to  originate  in  the  city,  village  or  township  in  which  the  taxpayer  resides, 
unless  die  taxpayer  is  the  estate  of  a  deceased  person,  or  a  trust  for  ac- 
cumulation and  future  distribution,  in  which  event  such  taxes  shall  be 
deemed  to  originate  in  the  city,  village  or  township  in  which  the  fiduciary 
resides  or  had  its  principal  place  of  business  in  this  state.  In  case  of 
joint  fiduciaries  of  such  estates  or  trusts  such  taxes  shaU  be  deemed  to 
originate  in  the  city,  village  or  township  in  whkh  each  such  fiduciary  re- 
sides, in  equal  ^res,  according  to  the  number  of  fiduciaries,  and  in  such 
«Fcnt  die  assessment  of  each  share  shall  be  separately  made  and  certified 
to  the  proper  counties  as  provided  in  this  xrhapter.  Where  one  or  more 
of  such  joint  fiduciaries  reside  outside  of  this  state,  the  assessment  shall 
cover  the  shares  attributed  to  the  fiduciary  or  fiduciaries  reading  in  iMs 
state  only,  and  the  remaining  shares  shaU  not  be  taxed;  but  tiiis  provision 
shall  not  be  deemed  to  apply  to  corporate  fi^aries  organized  by  or  under 
the  laws  of  another  state,  but  having  a  place  or  places  of  business  in 
Ms  state. 

^  Sec.  5773-34.  Whenever  the  county  auditor  shall  have  reascm  to 
beKeve  that  in  any  one  or  more  of  the  three  next  previous  years  the 
returns  made  by  any  taxpayer  were  incorrect  or  have  been  made  with 
mtent  to  defraud,  or  when  any  taxpayer  has  failed  or  refused  to  make 
a  retiwn,  report  or  statement  as  required  by  law,  the  assessor  of  incomes 
shall  make  audi  addftk>ns  and  corrections  to  the  next  assessment  as  he 
may  deem  true  and  just.  Whenever  the  county  auditor  shall  so  increase 
or  assess  any  income,  he  shall  give  notice  in  writing  to  the  person  liable 


l62 


for  the  payment  of  the  tax  thereon  of  the  amount  of  the  assessment. 
Stich  notice  may  be  served  by  r^stered  mail.  Omitted  taxable  inccmieB 
so  added  to  th^  assessment  of  a  subsequent  year  shall*  be  subject  to  the 
rate  belonging  to  the  year  or  years  in  which  they  were  taxable,  and  in 
case  of  fraud  of  wilful  failure  or  neglect  to  twice  such  rate. 

Sec.  5773-5.  In  addition  to  its  power  to  require  the  furnishing  of 
information  in  the  form  of  returns  made  to  it  by  companies,  firms,  cor- 
porations, persons,  associations,  co-partnerships  or  public  utilities,  which 
power  is  hereby  specifically  made  api^icable  to  the  securing  of  informa- 
tion to  enable  the  commission  to  carry  into  effect  the  provisions  of  t]|i9 
chapter,  the  commission  may  prepare  interrogatories  and  blank  forms 
to  be  attached  to  the  forms  of  reports,  statements  or  returns  required  by 
law  to  be  made  to  any  other  state  officer,  board  of  commission  for  the 
securing  of  such  information.  Any  such  state  officer,  board  or  commis- 
sion shall,  upon  request  of  the  commission,  attach  such  interrogatories 
and  forms  to  ^e  forms  of  sudi  reports,  Elements  or  fetums,  and  the 
perscms,  firms  or  corporations  required  to  make  such  reports,  statements 
or  returns  shall  make  specific  answers  to  such  interrogatories  and  fill  out 
such  blanks,  and  the  same  are  hereby  made  a  part  of  all  such  reports, 
statements  or  returns  for  all  purposes.  The  information  thus  acquired 
shall  be  transmitted  by  the  officer,  board  of  commission  to  which  the 
reports,  statements  or  return  is  made  to  the  commission  for  its  use  as 
provided  in  this  sectkm. 

Sec.  3773-3^'  county  auditor  may  correct  all  errors  and  mis- 

takes of  a  clerical  nature  which  he  discovers  in  the  income  tax  lists  and 
duplicates.  If  the  correction  is  made  after  the  duplicate  is  delivered  to 
the  treasurer,  the  correction  shall  be  made  on  the  margin  of  the  income 
tax  list  and  duplicate  without  changing  any  name  or  figure  in  the  dupli- 
cate as  delivered,  or  in  the  original  tax  Ust,  which  shall  always  corre- 
^ond  exactly  with  each  other. 

Sec.  5773-37.  If  at  any  time  the  auditor  discovers  that  taxes  under 
this  chapter  have  been  erroneously  charged  and  collected,  he  shall  call 
the  attention  of  the  ocmmission  thereto.  If  the  commission  finds  that 
such  taxes  have  been  so  erroneously  charged  and  collected,  it  shall  order 
the  proper  coimty  auditor  to  draw  his  warrant  on  the  county  treasurer 
in  favor  of  the  person  paying  them  for  the  full  amount  of  the  taxes  so 
ernmeoasly  duurged  and  collected.  The  county  treasurer  shall  pay  such ' 
warrant  from  the  general  revenue  fuHd  of  the  county.  At  the  next 
semi-annual  settlement  with  the  auditor  of  state  after  the  refunding  of 
such  taxes,  the  county  auditor  shall  deduct  from  the  amount  of  taxes 
due  the  state  the  amount  of  such  taxes  that  have  been  paid  into  the  state 
tmsiiry  ;  and  at  the  corresponding  settlement  between  the  county  auditor 


163 

and  the  county  treasurer  the  amount  of  such  taxes  that  have  been  paid  to 
any  city,  village  or  township  shall  be  charged  to  and  retained  from  the 
taxes  then  due  such  city,  village  or  township.  The  amounts  so  retained 
shall  be  credited  to  the  general  revenue  of  the  county.  No  such  taxes 
shall  be  so  refunded  except  as  have  been  erroneoudy  collected  in  the 
three  years  next  prior  to  the  discovery  thereof  by  the  county  auditor. 

Sec.  5773-38.  The  county  auditor  shall  preserve  in  his  office  the 
original  reports,  statements  and  returns  made  to  him  for  a  period  of 
three  years,  after  which,  unless  otherwise  ordered  by  the  commission, 
they  shall  be  destroyed. 

Sec.  5773-39.  All  contracts  or  agreements  whereby  one  person  di- 
rectly or  indirectly  assumes  or  promises  to  pay  or  bear  the  burden  of  any 
tax  payable  by  another  person  under  this  chapter  shall  be  illegal,  null  and 
void. 

Sec.  5773-40.  The  prosecutinfr  attorney  of  the  county  in  which  any 
action  or  proceeding  authorized  by  this  chapter  is  pending  or  in  cohtem- 
platicMi  shall  advise  and  represent  any  officer  charged  with  the  per- 
formance of  any  duty  or  invested  with  any  power  with  respect  thereto. 
Upon  the  written  request  of  the  commission,  the  attorney  general  shall 
appear  and  act  for  the  con^ission  or  any  of  such  officers  in  any  such 
action  or  proceeding.  ^ 

Sec.  5773-41.  Whoever  being  a  taxpayer  having  taxable  net  income 
in  any  year  or  being  charged  by  law  with  the  duty  of  making  an  income 
tax  return  in  any  capacity  refuses  to  make  a  return  at  the  time  requirerl 
by  law  or  knowingly  makes  a  false  or  fraudulent  return  shall  be  guihy 
of  a  misdemeanor  and  upon  conviction  thereof  shall  be  fined  not  to 
exceed  five  hundred  dollars,  or  be  imprisoned  riot  to  exceed  six  months, 
or  both. 

Sec.  55773-42*  Whoever,  being  a  county  auditor,  or  deputy,  as- 
sistant, clerk,  or  other  employe  of  a  county  auditor,  divulges  ^r  makes 
known  in  any  manner,  except  in  accordance  with  an  order  of  court  or  as 
otherwise  provided  by  law  the  amount  of  income  or  any  particulars  set 
forth  or  disclosed  in  any  report,  statement  or  return  required  by  or  under 
this  chapter,  or  permits  any  unauthorized  person  to  have  access  to  such 
reports,  statements  or  returns,  shall  be  deemed  guilty  of  a  misdemeanor 
and  upon  conviction  thereof  shall  be  fined  not  more  than  one  thousand 
dollars  and  imprisoned  not  more  than  one  year,  or  both,  and  shall  forfeit 
his  office  or  employment.  Nothing  in  this  section  shall  be  so  construed 
as  to  prevent  the  publication  of  statistics  so  classified  as  to  prevent  the 
identification  of  particular  reports,  statements  or  returns  and  the  items 
tliereof ,  or  th^  inspcfction  by  the  attorney  general  of  the  proper  prosecut- 


i64 


log  attorney  o£  the  report,  statement  or  return  of  any  taxpayer  who  has 

l^>pealed,  or  agains  whom  a  prosecution  is  pending  under  this  chapter. 

Section  2.   Section  1465-1  of  the  General  Code  is  hereby  amended 
to  read  as-foUcrws: 

Sec.  1 465- 1.  The  tax  commission  of  Ohio  shall  consist  of  four  com- 
missioners, not  more  than  two  of  whom  shall  he  of  the  same  political 
party.  Each  commissioner  shall  hold  his  office  for  a  term  of  six  years 
beginning  on  the  second  Monday  of  February.  The  governor  shall  ap- 
point the  commissioners  by  and  with  the  advice  and  consent  of  the  senate. 

Section  3.  Original  section  1465-1  of  the  General  G>de,  and  sec- 
tion I  of  the  act  of  May  10,  1910  (O.  L.  399),  designated  as  section  5445 
of  the  General  Code  are  hereby  repealed. 

Section  4.  The  several  sections  of  the  General  Code  and  parts 
diereof  enacted  in  section  i  of  this  act  and  the  provisions  of  sections  5 
md  6  hereof  are  hereby  declared  to  be  so  far  s^Mtrate  from  and  inde- 
pendent of  each  other  that  each  of  them  would  have  been  enacted  without 

regard  to  the  validity  of  any  of  the  others,  the  intent  and  purpose  of  this 
act  being  to  provide  for  the  levy  and  collection  of  a  tax  on  the  incomes 
of  persons  residing  in  this  state  to  the  full  extent  that  such  tax  may 
be  constitutionally  levied  and  collected,  but  no  further,  and  to  make  such 
tax  effective  at  the  earliest  possible  date  consistent  with  the  constitution. 

Section  5.  This  act  shall  not  affect  the  terms  of  office  of  the  mem- 
bers of  the  tax  commission  of  Ohio,  in  office  when  it  takes  effect,  nor  the 
term  for  which  any  vacancy  in  any  such  membership  shall  be  filled.  Im- 
mediately upon  the  taking  effect  of  this  act,  the  governor  shall  appoint, 
m  the  manner  provided  in  section  1465-1  of  the  General  Code  as  amended 
iKiielii,  one  mendier  of  the  tax  cononission  of  Ofno  for  a  term  ending  on 
the  day  preceding  the  second  Monday  of  February,  nineteen  hundred  and 
twenty-one.  The  successor  of  such  appointee  shall  be  appointed  for  Ac 
full  term  provided  in  said  section. 

Section  6.  The  tax  levied  by  this  act  shall  first  be  assessed  and 
cdkcted  iDpon  and  with  re^wct  to  net  inccmies  for  the  calendar  year  nine- 
teen hundred  and  nineteen.  The  first  return  under  this  act  of  a  taxpayer 
keefMng  his  accounts  on  the  basis  of  the  calendar  year  shall  be  made  for 
the  year  nineteen  hundred  and  nineteen  within  the  period  after  January 
first,  nineteen  hundred  and  twenty  prescribed  by  section  5773-13  of  the 
General  Code  as  herein  enacted.  The  first  return  under  this  act  of  a 
taxpayer  kee^mig  his  accotmts  on  the  basis  of  a  fiscal  year  ending  between 
tiie  first  day  of  July  and  ^  end  of  the  calendar  year  shall  be  made  within 
die  sam^  period,  and  ^lall  be  a  separate  rettmi  for  the  period  between 
January  fifst,  nineteeit  hundred  and  nmeteen  and  the  end  of  such  fiscal 


i6s 

year  ending  in  the  calendar  year  nineteen  hundred  and  nineteen,  subject 
to  the  requirements  of  section  5773-17  of  the  General  Code  as  herein  en- 
acted. The  first  return  of  a  taxpayer  keeping  his  accounts  on  the  basis  of 

a  fiscal  year  ending  at  any  other  time  shall  be  made  within  the  period 
after  the  of  such  fiscal  year  ending  in  the  calendar  year  nineteen  hundred 
and  twenty,  prescribed  by  section  5773-13  of  the  General  Code  as  herein 
enacted  and  shall  include  the  separate  return  prescribed  by  section  5773-17 
of  the  General  Code  as  herein  enacted  for  the  period  beginning  on  Jan- 
uary first,  nineteen  hundred  and  nineteen. 


> 


Date  Due 

1 

 ^ 

1 

1 
i 

j 

i 

4 


4 


MAY  1  0  198i-- iC'^-HlAY  1 1  1934 


